Download Economics and Business How to answer a question about

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