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Table of contents

The level of economic activity measured by the real GDP of a country is determined by
the interaction of aggregate demand and aggregate supply of the whole economy.
Changes in aggregate demand and aggregate supply determine the rate of economic
growth an economy achieves. An understanding of aggregate demand and supply is
crucial to understanding how the macroeconomy functions.

What you should know by the end of this chapter:

Definition of aggregate demand

Aggregate demand curve
Components of aggregate demand
Consumption
Investment
Government expenditure
Net exports: exports minus imports
Changes in aggregate demand caused
by changes in its determinants

Revision material
The link to the attached pdf is revision material from Unit 3.2(1): Variations
in economic activity - aggregate demand (AD). The revision material can
be downloaded as a student handout.

Revision notes

Determining economic activity

The level of economic activity in a country is measured by its real GDP which is determined by the interaction of
aggregate demand and aggregate supply of the whole economy. Changes in aggregate demand and aggregate
supply determine the rate of economic growth an economy achieves. For example, the current value of the US
GDP is over $25 trillion (nominal terms) because of the interaction of aggregate demand and aggregate supply in
the American economy. The application of aggregate demand and supply is another way of modelling the

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macroeconomy, similar to the circular flow of income model. The flow of income, output, and expenditure of an
economy in the circular flow model is determined by the interaction of aggregate demand and aggregate supply.

Inquiry case example - Measuring the US economy

GDP in the United States stood at $22,491 billion (real terms) at the end of
2022 according to Trading Economics. That makes it the biggest economy
in the world and the biggest economy of all time. Many commentators think
the US economy is performing relatively well in terms of economic growth.
In 2021 the US GDP was $22,225 (real terms).

Worksheet questions

Questions

a. Define the term real GDP. [2]

GDP is the monetary value of all goods and services produced by an economy in a given time period (normally
one year). Real terms mean an allowance for inflation is made in the calculation of GDP.

b. Calculate the US economic growth rate in 2022. [4]

US GDP 2022 - US GDP 2021 / US GDP 2021 x 100 = US economic growth rate 2022

$22,491 - $22,225 / $22,225 = 1.2%

c. Using a circular flow of income diagram, explain what the US real GDP figure of $222,491 shows. [4]

The US real GDP figure of $22,491 is the monetary value of all final goods and services produced by the US
economy in a given time period (one year) with an allowance for inflation. The real GDP figure can be measured
by the income, output and expenditure methods which are illustrated in the circular flow of income diagram.

d. Explain two factors that can be used to judge whether the US growth rate means the US economy is
performing well. [4]

The change in the growth rate over time could be used to judge US growth performance. If the growth rate has
increased this could mean improved performance and if the growth rate has fallen this could mean deteriorating
performance.

The US growth rate could be compared to the growth rates of other countries to make a judgement about the US
economy's performance in terms of its growth rate. A higher growth rate than other countries is strong relative
performance and a lower growth rate is weak relative performance.

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Investigation

Investigate the reasons that might

explain the size of the US economy.

Definition of aggregate demand

Aggregate demand is the total expenditure on all final goods and services produced in the economy at a given
price level and at a given point in time.

Aggregate demand is made up of the following components:

AD = consumption + investment + government expenditure + exports – imports

AD = C + I + G + (X – M)

The Aggregate Demand Curve

The Aggregate demand curve shows the relationship between the average price level of an economy and the
demand for the real output or GDP of the economy. The average price level of the economy is the average price of
all goods and services produced in an economy at a given point in time.

The relationship between aggregate demand and the average price level can be viewed in the same way as the
microeconomic theory of the law of demand for a good in a particular market. If the price of mobile phones falls,
the quantity demanded increases. In the same way, a decrease in the average price level in the macroeconomy
leads to an increase in the aggregate demand for the real output of the economy and if the average price level
increases the aggregate demand for the real output decreases.

One way of explaining this is that

a fall in the average price level
means households, firms,
government, and foreign trade
sector can now buy more of the
domestic output of the economy
with the same real
income. Diagram 3.3 shows how
a fall in the average price level in
an economy causes an increase
in aggregate demand for the real
output of the economy. If there is
a rise in the average price level
this means households, firms,
government and foreign sectors
can buy less of the domestic
output of the economy with the
same real income.

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Consumption (C)

Definition of consumption

Consumption is household spending on final goods and services. Some goods are intermediate such as
manufacturers selling goods to retailers and this spending is not included in consumption.

Consumption spending would be spending on goods and services like food, energy, consumer electronics
products, cars and leisure activities, etc. Consumption spending in More Economically Developed Countries
(MEDCs) accounts for around 70 per cent of total GDP and is even higher than this in Economically Less
Developed Countries (ELDCs).

Determinants of consumption

Household income and consumption

There is a positive relationship between consumption and household income. As household incomes rise,
households spend more on normal goods. This includes necessities such as food and energy, as well as spending
on luxuries such as new cars and holidays. We know from our microeconomic analysis that the strength and type
of relationship between income and consumption depends on the type of good and its income elasticity of
demand.

Interest rates

An interest rate is the cost borrowers pay for borrowed funds and the
reward lenders receive for lending funds (the cost of borrowing and
the reward for lending).

There is a negative relationship between consumption and interest

rates. When interest rates rise consumption decreases and when
interest rates fall consumption increases.

The relationship between interest rates and consumption exists for the following reasons:

The cost of borrowing for expensive goods (cars, home improvements, etc.) increases when interest rates
rise and spending for these types of ‘big ticket items’ falls.
The reward for saving increases as interest rates rise which increases households' desire to save rather
than spend.
The cost of existing borrowing, particularly mortgage payments for house purchases, increases as interest
rates rise and this leaves households with less disposable income for consumption.

Note: the opposite effect occurs when interest rates fall.

Consumer confidence

Consumer confidence is household expectations of their future economic prospects. Consumer confidence has a
significant impact on current consumption spending. If households feel pessimistic about their job prospects or
future incomes, they will reduce current consumption and consumption rises if they feel optimistic.

Economists see consumer confidence as an important ‘leading indicator’ because it tells them what might happen
to economic growth in the future. In the US consumer confidence is measured by the CCI which is a survey of
households produced by the Conference Board.

The ‘credit crunch’ in 2008 led to a huge fall in US consumer confidence which reduced household spending
which in turn contributed to falling growth in GDP and this led to a recession in the US.

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Inquiry case example - Forecasting consumer confidence

The consumer confidence model is a simple one: a rising confidence index indicates rising confidence, higher
confidence means more consumption spending, and this increases GDP. If you can forecast consumer
confidence, you can forecast economic growth.

But this model is seen as increasingly flawed for three reasons:

If consumption is financed by debt, then

the rise in consumption may not be a
sustainable driver of economic growth.
In the end, households need to pay the
borrowed money back and make
interest payments.
Confidence surveys can skew
confidence. Because confidence data is
so widely reported it can distort
consumption. If a headline says, ‘record
drop in confidence’ this might artificially
cause consumer confidence to fall.

Because economies are increasingly globalised and complex, confidence data is not as useful at
forecasting changes in GDP. Changes in global stock and bond markets may have a greater impact on
future US GDP than a change in the US CCI index.

Worksheet questions

Questions

a. Define the term consumption expenditure. [2]

Consumption is household spending on final goods and services.

b. Explain why a decrease in interest rates in the US might lead to an increase in consumption
expenditure in the US economy. [4]

When interest decrease in the US consumption expenditure might increase because:

Saving becomes less attractive as interest payments fall

Borrowing to fund major items of expenditure becomes less expensive
Household disposable income rises as existing interest payments decrease.

c. Define the term consumer confidence. [2]

Consumer confidence is household expectations of their future economic prospects.

d. Using a diagram, explain how a rise in US consumer confidence might affect US aggregate demand. [4]

As US consumer confidence rises households are more optimistic about consumption spending on goods and
services and this leads to a rise in consumption in the US economy. Consumption is a component of aggregate
demand which means a rise in consumption spending will lead to a rise in aggregate demand in the US. This is
shown in the diagram by an increase in aggregate demand from AD to AD1.
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e. Using the circular flow of income

model, explain how a rise in savings
caused by a fall in consumer
confidence in a country affects its
firms, households, and government.
[10 marks]

Answers might include:

Definitions of the circular flow of

income model and savings.
A diagram to show the circular flow
of income that illustrates how a rise
in savings reduces the funds in the
circular flow. In the diagram, a rise
in savings is shown by the yellow
withdrawal arrow.
An explanation that a rise in savings
increases withdrawals from the
circular flow of income which
reduces consumption expenditure.
This can lead to a fall in revenues
and profits for firms in the economy.

An explanation that lower business revenues mean firms will pay less income to households in the form of
wages, interest, rent and profits.
An explanation that less household consumption expenditure, lower household incomes and less business
profits can lead to a fall in government tax revenue and this could increase the budget deficit.
An example of a country such as the UK where savings have increased during 2020-21 because of the
pandemic and how this has led to a fall in real GDP in the UK.

Investigation

Think about how you might produce a consumer confidence survey amongst people at your school.

Household indebtedness

Indebtedness is the value of current household borrowing. The higher the value of debt households hold the lower
their current level of consumption. This is because households have less money for current consumption if they
need to repay debt and have high-interest payments to make on their outstanding debt.

Wealth

Household wealth is the value of assets households own. These are assets that can be held in the following
forms: cash, property and shares, etc. The most important asset for most households in the economy is the
house they own.

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When house prices rise people feel wealthier and this increases their consumption spending. House prices in the
UK increased dramatically from 2011 until 2016 leading to a significant increase in household wealth which
caused a rise in consumption spending in the UK.

If house prices fall households feel poorer and this can lead to a fall in consumption. It was the fall in US house
prices in 2006 that triggered a fall in consumption in the US which was one of the contributing factors to the
recession in the US in 2008 and the subsequent global financial crisis.

Inflation

Inflation can have two different effects on consumption:

Rising prices can make consumers bring forward purchases and increase consumption. This is because
waiting to buy goods when they will increase in price in the future makes the goods more expensive and
households will consume more in the present.
If prices rise because of increasing costs, this erodes household disposable income and causes a fall in
consumption spending. This is particularly the case if the price of necessities such as food and energy
increases.

Investment (I)
Definition of investment

Investment is where resources are allocated

to produce capital goods that can build up
the future productive capacity of an
economy. Investment is an injection into the
circular flow of income. Economists normally
consider investment in terms of firms buying
new plant and machinery. For example,
Apple’s investment spending last year was
$16 billion.

Types of investment

Investment spending by organisations can be categorised in five different ways:

Fixed investment is where firms purchase plant and machinery. For example, Toyota plans to build a new
electric vehicle plant worth $1.2 billion in the Chinese city of Tianjin.
Human investment means that firms allocate resources to education and training which are used to
increase the productive capacity of labour.
Research and development is investment in new products and processes. Research and development
account for 7.9 per cent of Apple’s revenue and it spent $14 billion on R&D last year.
Social investment involves allocating resources that can improve the future welfare of a country’s
citizens. Building new schools and hospitals has significant social benefits for society in the long term.
Infrastructure investment means allocating resources to the major physical systems that serve a
country’s population. Infrastructure investment is in areas like energy, transport, water and waste, flood
management and digital communications.

Determinants of Investment

Economic growth and investment

A certain amount of investment takes place in an economy and is not affected by changes in GDP. Firms often
plan major projects years in advance and unless there is a significant drop in economic growth the projects go
ahead regardless of changes in GDP. Replacement investment is also less affected by changes in economic

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growth. This is where firms have to replace worn-out capital and it needs to take place for a firm to operate
efficiently.

Some investment is responsive to changes in GDP. As the economy grows (particularly if the rate of growth
increases) businesses will invest in new capital because they need to increase output to meet an increase in
demand. This is particularly true for firms that sell products with a high positive income elasticity of demand. For
example, service sector businesses like restaurants, cinemas and gyms will increase investment in new capital to
meet a rise in demand when household incomes rise.

Business confidence

Business confidence is managers' expectations of

future profits and sales. It is important in determining
investment decisions. If managers anticipate a rise in
future economic growth, they are much more likely to
decide to open a new factory and buy capital
equipment. Business confidence in different countries
is often measured by using the Purchasing Managers
Index (PMI)

Availability of funds

At a macroeconomic level, the funds available for the economy to invest in are determined by the level of savings.
Household savings goes to the banking system and banks then lend these funds to firms to invest. The higher the
level of savings of households the more funds there are for investment and the greater the amount of investment
there will be at a macroeconomic level.

The profits earned by businesses are a major source of funds for firms and the more profits businesses earn the
higher the level of investment. The amount of bank lending affects how much money firms can access to fund
investment projects. The financial crisis of 2008 saw banks cut their lending dramatically to businesses which
reduced the level of investment in many economies.

Interest rates

Because so many investment projects are funded partly or entirely by borrowed funds the rate of interest has a
major effect on their viability. At relatively high rates of interest the cost of borrowing increases which reduces the
profit stream from an investment project and makes the project less likely to go ahead. High interest rates also
offer firms a relatively good rate of return on holding funds in the bank so the rate of return of a project has to be
greater than the rate of interest funds could earn in the bank. If interest rates fall then investment rises because
the cost of funding projects falls and the alternative return from holding funds in the bank decreases.

Corporate indebtedness

Corporate indebtedness is the total value of borrowing firms currently have. The amount firms can borrow is
reduced if they carry a high level of debt. Large business debts have high interest costs and make banks reluctant
to lend to firms.

Inquiry case example - Investing in the world’s tallest building

The Burj Khalifa is an 829.8 m (2,722 ft) skyscraper in Dubai. The building was completed in 2009 at a cost of
$1.5B. It houses offices, residential homes, hotels, leisure facilities and retail space. It is not a cheap place to live
or to locate a business. Two-bedroom apartments go for about $2m. Real estate is an important part of investment
in a country where buildings increase the productive capacity of the economy.

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Worksheet questions

Questions

a. Define the term investment. [2]

b. Explain how a fall in interest rates might have affected the decision to invest in the Burj Khalifa. [4]

If interest rates fall this makes the cost of borrowing decrease which would reduce the cost of funding the Burj
Khalifa. Lower interest rates would also reduce the returns the owners of the Burj Khalifa would have received
from holding their investment funds in the bank. Both these factors would have made the decision to build Burj
Khalifa more likely.

c. Outline how the business that built the Burj Khalifa would have made a profit from it. [2]

The Burj Khalifa would have made a stream of future profits for its owners when it rented or sold space in the
building for offices, shops, hotels and other types of leisure activity.
Investigation

Research into another major investment project and the factors that influenced the decision to go ahead
with it.

Government expenditure (G)

Types of government expenditure

Government expenditure has an important influence on macroeconomic activity. Most government spending
accounts for between 30 and 40 per cent of GDP. Government expenditure is an injection into the circular flow of
income. There are three types of government expenditure in the economy:

Current expenditure on the day-to-day running of the government sector such as paying the wages of
teachers, doctors and military personnel.
Capital expenditure on investment projects financed by the government such as roads, bridges and
schools.
Transfer expenditure on welfare payments such as unemployment and housing benefits. It is important to
note that government transfer spending is not included as part of aggregate demand because there is no
productive return for the spending by the government.

Determinants of government expenditure

Fiscal policy
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Fiscal policy is where government expenditure and taxation are used to achieve a government’s economic
objectives. These objectives include areas such as sustainable economic growth, price stability, full employment,
and balance of payments equilibrium. Governments plan their level of expenditure to achieve these objectives. For
example, the government might increase its expenditure to increase economic growth if the economy is in a
recession.

Taxation

The amount of money a government can raise through taxation will have a major influence on the amount
governments can spend. Rich developed countries collect more money through direct and indirect taxation and
this enables them to spend more on public services like health and education than economically less developed
countries. The more tax the government can raise the more it can spend.

Borrowing

When government expenditure is greater

than tax revenue the government needs to
borrow money. This is done by selling
bonds in the financial markets. For
example, if the US government sells $500
billion of government bonds, then it will
raise $500 billion in funds to spend on
health, education and defence, etc.

Investors buy bonds because they earn interest on them and they will be repaid in the future. The bonds can also
be bought and sold on the financial markets. The budget deficit is one year’s government borrowing and
accumulated government borrowing over time is called the national debt. The current US budget deficit is
$1.7 trillion, and the national debt is $33 trillion.

Political objectives

The political objectives of the government will affect the level of expenditure. Left-wing governments tend to
believe that more state involvement in the economy will spend more than right-wing governments.

Inquiry case example - Public spending in Denmark

Denmark is one of the most generous countries in the world when it comes to government welfare spending
averaging 55% of GDP over the last 20 years. Denmark is a rich country with a GDP per capita of $60,897 last
year and it has a high average rate of tax of 55%. The Danish government has a plentiful source of tax revenue to
fund such a significant state welfare programme.

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Denmark leads other OECD countries in terms of spending on old age-related programs and health-related
expenditures. The country is very supportive of the poorest in its society with a poverty rate of just 5.4% (lowest in
the OECD). More than 33% of all transfer spending in Denmark goes to the bottom 20% of income earners. The
country’s borrowing levels are relatively modest with a national debt of 34% of GDP and a budget deficit of 0.6%
of GDP.

Worksheet questions

Questions

a. Define the term budget deficit. [2]

The budget deficit is one year’s government borrowing where government expenditure is greater than government
revenue.

b. Explain the differences between government current, transfer and capital expenditure. [4]

Current expenditure on the day-to-day running of the government sector such as paying the wages of teachers,
doctors and military personnel. Capital expenditure on investment projects financed by the government such as
roads, bridges and schools. Transfer expenditure on welfare payments such as unemployment and housing
benefits.
c. Explain two ways the Danish government can finance its expenditure. [4]

Denmark's government could raise funds to finance its expenditure through tax revenue. This could be a direct tax
on household incomes and business profits along with an indirect tax on expenditure such as VAT. The second
way it could raise money is through borrowing by selling bonds.
Investigation

Investigate the reasons why Denmark has such a generous government welfare system.

Net Exports (X-M)

Defining net exports

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A country’s net exports are the value of its exports (X) less the value of its imports (M). A positive value for net
exports leads to a net inflow of funds into the economy and a negative net export value leads to a net outflow of
funds from the domestic economy.

Exports

Exports are domestically produced goods and services sold in overseas markets that generate an inflow of funds
into the domestic economy. Exports are an injection into the circular flow of income.

Imports

Imports are goods and services produced overseas and sold in the domestic economy that generate an outflow of
funds from the domestic economy. Imports are a withdrawal from the circular flow of income.

Determinants of net exports

Net exports will change if there is a change in the value of exports and imports.

Economic growth in overseas markets

If there is strong economic growth in overseas markets this will lead to a rise in exports as foreign households
have more income to spend on imported goods (exports) from other countries. The reverse is true if overseas
markets are in recession and foreign households have less income and buy fewer imported goods (exports) from
other countries.

Economic growth in domestic markets

If domestic economic growth rises households will have rising incomes and will spend more on imports and this
will lead to a fall in net exports. If domestic growth falls household spending on imports will fall because
households will have lower incomes and will buy fewer imported goods which leads to a rise in net exports.

Exchange rate

If the domestic exchange rate falls, domestic exports may rise as domestic export prices fall in overseas markets.
A fall or (depreciation) in the exchange rate will also lead to a rise in import prices which may lead to a fall in
import expenditure. If the exchange rate rises (appreciates) domestic goods will rise in price overseas and the
demand for exports will fall. A rise in the exchange rate will cause a fall in the price of imports and a rise in
demand for them.

Trading strength

Some countries perform better in international

markets than others. China, Germany and Japan
have very strong manufacturing sectors and have a
positive next export value. On the other hand,
countries like the US and UK have weaker
manufacturing sectors and have a negative net
export value.

Inquiry case example - Germany is top of the table

In 2019 Germany posted the biggest trade surplus (value of exports less value of imports - net exports) in the
world. One of the reasons for its trading success is the size and quality of its manufacturing sector. Manufacturing
makes up over 20 per cent of Germany’s GDP partly because it has so many great manufacturing names like
BOSCH, Siemens, BMW and Allianz. You can see why Germany is such a successful trading nation.

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Worksheet questions

Questions

a. Define the term net exports. [2]

A country’s net exports are the value of its exports (X) less the value of its imports (M).

b. Explain how an increase in the surplus in Germany’s net exports might affect the country’s aggregate
demand. [4]

As the surplus in Germany's net exports increases the country's aggregate demand will rise because in the
equation:

AD = C + I + G + X - M

An increase in net exports (X - M) will increase AD.

c. Explain why Germany's strength in manufacturing might account for its surplus in net exports. [4]

Because Germany is so competitive in producing goods such as cars, consumer electronics goods and industrial
products the demand for its goods is very strong in overseas markets which earns it high levels of export revenue.
Overseas businesses will also find it difficult to sell into the German market because German businesses are so
competitive and this reduces German imports.
Investigation

Research another country that has a significant trade surplus and find out why it is a successful trading
nation.

Changes in aggregate demand

Aggregate demand will change if any one of consumption, investment, government expenditure and net exports
change. A change in the components of aggregate demand will cause the aggregate demand curve to shift.
Diagram 3.4 shows an increase in aggregate demand and the aggregate demand curve in the economy shifts
from AD to AD1 changes. A decrease in aggregate demand is also shown by a shift in the aggregate demand
curve from AD to AD2.

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Examples of factors that may cause a change in AD:

Decrease in interest rates

If interest rates fall this leads to a rise in consumption and investment as households and firms respond to lower
borrowing costs and this, in turn, leads to a rise in aggregate demand. AD shifts to AD1 in diagram 3.4.

Fall in business and consumer confidence

If households and firms become less confident about their future economic prospects, then households will reduce
consumption and firms will reduce investment leading to a fall in aggregate demand and AD shifts to AD2 in
diagram 3.4.

Increase in government expenditure

If government expenditure increases as part of expansionary fiscal policy this will lead to a rise in aggregate
demand. This causes AD to shift to AD1 in diagram 3.4.

The rise in net exports

If a country’s exchange rate depreciates and it experiences a rise in exports and a fall in imports, then aggregate
demand will increase, and AD will shift to AD1 in diagram 3.4.

Inquiry case example - The Chinese consumer

China is beginning to shake off the effects of COVID-19 and Chinese consumers might offer us a sense of where
a world economic recovery might come from. Chinese annual consumer spending is approaching $ 8 trillion
annually and it represents a huge opportunity for the world’s exporting companies. Helped by low interest rates,
rising consumer confidence, and increasing asset prices the Chinese consumer is in the mood for spending.

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Worksheet questions

Question

Explain the effect a rise in consumer confidence and a decrease in interest rates might have on China's
aggregate demand. [10]

Answers might include:

Definitions of consumer confidence,

interest rates and aggregate
demand.
A diagram to show the effect of a
rise in consumer confidence and a
decrease in interest rates on
China's aggregate demand.
An explanation of how rising
consumer confidence increases
consumer expenditure and
increases aggregate demand.
An explanation that a decrease in
interest rates increases consumer
expenditure and increases
aggregate demand.
Investigation

Research into the growing importance

of China's consumption expenditure.

Thinking about a key concept - Scarcity

Many Economics courses start with coverage of scarcity and it is often looked at from a microeconomic
perspective. It is also possible to consider scarcity in terms of macroeconomics when aggregate demand grows
strongly and puts a country's limited resources under pressure. A nation's resources are scarce and when
aggregate demand increases the price of scarce resources increases. Rising prices in particular in industrial
sectors such as energy, housing and food are indicators of scarcity at a macroeconomic level.

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How important is scarcity in causing the price level in an economy to increase when aggregate demand is
rising?

Now test yourself

Using the following data for country A, what is the level of aggregate demand?

$Bn G = 250; C = 520; X = 120; I = 410; M = 180

A. $1300B

B. $1180B

C. $1480B

D. $1120B

Which of the following is not true about consumption expenditure?

A. It often accounts for about 70% of total expenditure in an economy

B. It is positively related to household income

C. It is an injection into the circular flow of income

D. It is total household spending on final goods and services

Which of the following is the best definition of an Interest rate?

A. The net difference between the reward for saving money and the cost of borrowing money

B. The cost of borrowing money from lenders

C. The reward for saving money and the cost of borrowing money

D. The reward for saving money in a bank

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Which of the following is unlikely to increase investment?

A. Central bank cutting base interest rates

B. Increase in corporate profits

C. A breakthrough in new technology in an industry

D. Fall in the Purchasing Managers Index

Which of the following is not true about government expenditure?

A. Wages of doctors, teachers and the police are part of current expenditure

B. Unemployment benefit is transfer expenditure

C. A significant road-building programme by the government is capital expenditure

D. Grants paid to businesses who locate in a declining region is a tyre of current expenditure

Using the following data for country X, which of the following is true?
($Bn) G = 200; T = 150; National debt = 800; GDP 2000

A. Country X has a budget surplus

B. Country X’s national debt is falling

C. Country X’s national debt is 60% of GDP

D. Country X’s budget deficit as a 2.5% of GDP

Which of the following is most likely to cause an increase in the value of net exports of Country Y?

A. Fall in Country Y’s exchange rate

B. Fall in the value of exports of Country Y

C. Rise in Country Y’s exchange rate

D. Rise in the value of imports into Country Y

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Which of the following is the most likely to cause a fall in AD to AD1 in Country B?

A. A decrease in government transfer expenditure in Country B

B. A decrease in tax in Country B

C. A depreciation in Country B's currency

D. A decrease in interest rates in Country B

Which of the following is most likely to cause Aggregate Demand in Country X to fall?

A. A fall in the value of Country X's currency

B. A fall in direct tax in Country X

C. A fall in consumer confidence in Country X

D. A fall in the base interest rate set by Country X’s central bank

10

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Using the data in the table for Country B which of the following is most likely to be true?

A. There is a positive relationship between consumption expenditure and household income

B. Country B is in the recession phase of the business cycle

C. Household real incomes are increasing

D. All consumers are saving some of their income

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