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

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

Problem? Least likely to increase Means most likely to decrease

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)

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.

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

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

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

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

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