Factors Influencing Aggregate Demand Quiz

Government spending contributes to aggregate demand.

Investment includes business spending on capital goods, such as equipment and machinery.

Aggregate demand equals consumption, investment, government spending, and net exports minus imports.

Higher consumer confidence leads to greater spending and thus increases aggregate demand.

Lower interest rates reduce the cost of borrowing, leading to increased consumption and investment.

A weaker domestic currency makes exports cheaper for foreign buyers and imports more expensive for domestic consumers, boosting net exports and aggregate demand.

Government spending injects funds into the economy, directly increasing aggregate demand.

A stronger exchange rate makes exports more expensive for foreign buyers and imports cheaper for domestic consumers, reducing net exports and aggregate demand.

When consumers are optimistic about future economic conditions, they are more likely to spend, boosting aggregate demand.

External shocks like natural disasters can disrupt production, impacting aggregate demand.

The multiplier effect explains how an initial change in spending ripples through the economy, resulting in a larger change in real GDP.

When individuals feel wealthier due to factors like rising home prices or stock values, they tend to spend more, boosting aggregate demand.

High inflation erodes purchasing power, leading to reduced real incomes and spending, thus decreasing aggregate demand.

Autonomous consumption is spending not influenced by income changes, while induced consumption rises or falls with income variations.

The accelerator effect suggests that changes in income and output can lead to proportional changes in investment, influencing aggregate demand.

A looser monetary policy, such as lowering interest rates or quantitative easing, encourages borrowing and spending, thereby increasing aggregate demand.