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AS Economics and Business How to answer a question about aggregate demand Unit 2B By Mrs Hilton For revisionstation. Here is the question.

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  1. AS Economics and BusinessHow to answer a question about aggregate demandUnit 2BBy Mrs HiltonFor revisionstation

  2. Here is the question • In 2009, a number of policies were introduced in order to stimulate aggregate demand within the UK economy. Which one of the following policies is least likely to increase aggregate demand? [4] • A An increase in government spending on public services • B An increase in interest rates • C A reduction in income tax • D A reduction in corporation tax

  3. Problem? • Least likely to increase • Means most likely to decrease

  4. Aggregate demand? • Aggregate Demand is the total demand for goods and services within an economy • Aggregate means a total added up of all demands or goods bought in an economy • The total of demand is known as national expenditure. This is the sum total of everything that we in the UK have spent together. • This total of demand is a total of 4 components (see next slide)

  5. 4 components of aggregate demand • C= consumption spending of households on goods and services – can be affected by interest rates if they go up cost of borrowing rises so spending decreases and demand falls. • I = investment spending by firms, higher rate of interest lower returns therefore lower spending by firms, also affected by corporation tax which may if reduced increased business spending • G = government spending, assumed to be independent of economic variables and only affected by policy • (X-M) = Exports minus imports – these would be affected by interest rates and exchange rates.

  6. How should I write it in a question? • We show this as: • E = C + I + G + (X-M) • Where E is national expenditure total demanded

  7. How do we remember E=CIGX-M then? • Eeee • Smoking CIGs • X-Man

  8. Back to the question • In 2009, a number of policies were introduced in order to stimulate aggregate demand within the UK economy. Which one of the following policies is least likely to increase aggregate demand? [4] • A An increase in government spending on public services • B An increase in interest rates • C A reduction in income tax • D A reduction in corporation tax

  9. Answer? • Option B – an increase in interest rates is the least likely to stimulate aggregate demand • Consumers and businesses in the UK are not going to demand more if the cost of borrowing has gone up • As the cost of borrowing goes up disposable income goes down, so aggregate demand falls

  10. Which other option to eliminate? • Option C • A reduction in income tax will mean that consumers have more disposable income and so they will demand more goods, so aggregate demand will increase

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