Lesson 4.2.2.3

4.2.2.3 The determinants of aggregate demand Quiz: AQA Economics, Unit 2

20 questions

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Lesson 4.2.2.3, The determinants of aggregate demand: 20 multiple choice questions for the AQA Economics (7136), Unit 2: The national and international economy, written with Revision Ninja.

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The 20 questions

  1. Aggregate demand is best defined as:

    • The total planned spending on domestic goods and services in the economy at a given price level.
    • The total quantity of goods and services that firms are able to supply in the economy at a given price level in the period.
    • The total number of workers who wish to be employed at the prevailing wage rate in the economy at a point in time.
    • The total value of money held by households and firms in bank deposits and cash balances at a given date in the year.

  2. Which equation expresses aggregate demand?

    • AD = Y - C, where Y is national income and C is consumption, so that AD equals the value of saving in the economy.
    • AD = C + S + T, where C is consumption, S is saving and T is taxation, which together make up total national spending.
    • AD = I - S, where I is investment and S is saving, so that AD measures the gap between investment and saving in the economy.
    • AD = C + I + G + (X - M), where C is consumption, I investment, G government spending, X exports and M imports.

  3. Which of the following is a determinant of consumption?

    • The level of government borrowing from the central bank, which affects only the money supply held by banks.
    • Disposable income, since households spend more when their post-tax income rises, other things being equal.
    • The number of firms registered in the economy, which affects only the supply side of the market for goods.
    • The rate of exchange on the currency, which affects only the price of imports bought by firms in the economy.

  4. Which factor is most likely to increase investment spending by firms?

    • A fall in the interest rate, which lowers the cost of borrowing and raises the expected return on new capital projects.
    • A fall in business confidence, which increases the expected return on new capital projects in the economy during the period under review.
    • A rise in the price of capital goods, which reduces the cost of investment and so encourages firms to invest more.
    • A rise in the interest rate, which raises the cost of borrowing and so encourages firms to invest more in capital.

  5. Which of these is a determinant of imports?

    • The number of hours worked in the domestic construction sector, which affects only domestic output of buildings.
    • The level of domestic savings held in banks, which affects only the money supply rather than trade flows in the economy.
    • The level of government spending on schools, which affects only domestic production of education services in the economy.
    • Domestic income, since higher incomes raise households' demand for imported goods and services in the economy.

  6. What is the basic accelerator process?

    • A change in output causes an equal proportional change in investment, because firms keep their capital stock fixed at all times.
    • A change in investment causes an equal proportional change in consumption, because households respond to firms' spending.
    • A change in output causes a larger proportional change in investment, because firms adjust their capital stock to the level of demand.
    • A change in the price level causes firms to reduce their investment, because higher prices always lower the demand for capital.

  7. Which of the following is a determinant of the level of saving?

    • The number of companies listed on the stock exchange, which affects only the financial sector of the economy at any time.
    • The number of government departments, which affects only the size of public expenditure and not household saving.
    • The level of household income, since saving typically rises as income rises, other things being equal.
    • The rate of inflation of imported goods, which affects only the balance of payments on the current account in the year.

  8. What is the difference between saving and investment?

    • Saving is spending by government on public services, while investment is spending by households on consumer goods.
    • Saving and investment are identical, because every pound saved is automatically spent on new capital goods in the economy.
    • Saving is spending on new capital goods by firms, while investment is the part of income that households do not spend.
    • Saving is the part of income not spent on consumption, while investment is spending on new capital goods by firms.

  9. Which component of aggregate demand is the largest in the UK economy?

    • Consumption by households, which makes up the largest share of aggregate expenditure.
    • Imports of goods and services, which make up the largest share of aggregate expenditure in the economy.
    • Investment by firms, which makes up the largest share of aggregate expenditure in the economy each year.
    • Exports of goods and services, which make up the largest share of aggregate expenditure in the economy.

  10. An increase in government spending on infrastructure, with other components unchanged, will:

    • Shift the aggregate demand curve to the right, since government spending is a component of aggregate demand.
    • Shift the short-run aggregate supply curve to the right, since government spending always reduces production costs for firms.
    • Leave aggregate demand unchanged, since government spending is counted as part of the supply side of the economy only.
    • Shift the aggregate demand curve to the left, since government spending reduces the consumption of households in the economy.

  11. Which change would shift aggregate demand to the left through the exports component?

    • A fall in the price of imports, which reduces the cost of domestic production and so reduces aggregate demand.
    • A fall in the value of exports as foreign demand for domestic goods falls, reducing net exports.
    • A rise in imports as domestic households buy more foreign goods, which reduces the level of net exports in the economy.
    • A rise in exports as foreign demand for domestic goods rises, increasing net exports and aggregate demand in the economy.

  12. Which factor would reduce household consumption, other things being equal?

    • A rise in household debt repayments, which reduces the income households have available to spend on goods and services.
    • A fall in consumer confidence, which increases household spending as consumers take more risk with their money.
    • A rise in household wealth, which reduces the need for households to save and so reduces their spending on goods.
    • A fall in income tax, which reduces disposable income and so reduces the consumption households can afford in the period.

  13. A fall in interest rates would be expected to increase aggregate demand through:

    • Higher saving rewards for households, which encourages them to spend more of their income on consumer goods in the period.
    • Higher costs of borrowing, which discourages firms from taking on debt and so raises their investment spending in the economy.
    • A rise in the exchange rate, which increases the demand for exports and so reduces imports in the economy at all times.
    • Lower borrowing costs for consumers and firms, which encourages spending on durable goods and investment in capital.

  14. Why does an increase in saving reduce aggregate demand in the short run?

    • Households reduce their imports, so net exports fall and aggregate demand rises in the economy in the short run in the case described.
    • Households invest more in capital goods, so the level of consumption and aggregate demand rises in the economy in every case.
    • Households spend more of their income on consumption, so planned expenditure rises whenever saving increases in the economy.
    • Households spend less of their income on consumption, so planned expenditure falls unless investment or other components rise.

  15. Which statement about the determinants of AD is most accurate?

    • Each component depends on exactly the same factor, so changes in AD always reflect a single variable in the economy.
    • Aggregate demand is fixed in the long run, so none of its components can change in response to economic conditions at all.
    • Aggregate demand is determined only by the money supply, so no other factor affects the total level of spending in the economy.
    • Each component depends on different factors, such as income, interest rates, confidence and exchange rates, so AD can change in many ways.

  16. A rise in the exchange rate, with other factors unchanged, is likely to:

    • Reduce net exports, since exports become more expensive for foreign buyers and imports become cheaper for domestic buyers.
    • Increase net exports, since exports become cheaper for foreign buyers and imports become more expensive for domestic buyers.
    • Leave net exports unchanged, since the exchange rate affects only the financial account of the balance of payments.
    • Increase aggregate demand through a rise in government spending, since the exchange rate directly sets public expenditure.

  17. An evaluation point about the accelerator is that it:

    • Always produces exactly the same level of investment whatever the change in output, so it is a precise rule in every case.
    • Shows that investment is always zero when output rises, so firms never invest in new capital during an economic upswing.
    • Shows that investment depends only on the interest rate, so changes in output have no effect on investment in the economy.
    • Relies on firms having spare capacity to respond quickly, and in practice firms may delay investment because of uncertainty.

  18. Which of the following best explains why business confidence affects investment?

    • Confident firms expect higher future returns from new capital, so they are more willing to invest in projects today.
    • Business confidence affects only the level of saving by households, so it has no direct effect on investment spending.
    • Business confidence affects only imports of raw materials, so it has no effect on the level of domestic investment at all.
    • Confident firms expect lower future returns from new capital, so they are less willing to invest in projects today.

  19. A rise in the marginal propensity to consume, with other things equal, would be expected to:

    • Increase consumption and so raise aggregate demand, since households spend a larger share of each extra pound of income.
    • Increase saving and so raise aggregate demand, since saving is a component of aggregate demand in the economy.
    • Reduce consumption and so lower aggregate demand, since households spend a smaller share of each extra pound of income.
    • Leave consumption and aggregate demand unchanged, since the marginal propensity to consume affects only the supply side.

  20. Which statement about the net exports component of aggregate demand is correct?

    • Net exports are excluded from aggregate demand, so changes in trade never affect the level of aggregate demand in the economy.
    • Net exports equal exports plus imports, so a rise in imports raises the total of aggregate demand in every period of time.
    • Net exports equal exports minus imports, so a rise in imports relative to exports reduces aggregate demand.
    • Net exports equal imports minus exports, so a rise in imports increases aggregate demand in the economy in every case.

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