Which component of UK aggregate demand is the largest?

Consumption, which accounts for roughly two-thirds of aggregate demand.

Why does the aggregate demand curve slope downwards?

A lower price level raises the real value of money balances, tends to lower interest rates and makes domestic goods more competitive abroad, so planned spending rises.

Name four factors that influence consumption.

Real disposable income, interest rates, consumer confidence and household wealth.

Explain how a rise in house prices affects consumption.

Homeowners feel wealthier and can borrow against the higher value of their property, so they save less and spend more out of current income, which is the wealth effect.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

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Enterprise, Business and the Economy

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Introducing the Market

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Market Failure Across the Economy

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Macroeconomic Policies and Impact on Firms and Individuals

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The Economic Cycle

Aggregate demand and its components

3 things to know
Papers 2 and 3

Overview

Recall questions on aggregate demand and its four components, why the curve slopes downwards, what counts as investment, and how confidence, interest rates and sterling move it.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Consumer confidence falls sharply while interest rates are unchanged. Describe the effect on aggregate demand and on equilibrium output.

Key term

What is aggregate demand?

Key term

State the components of aggregate demand.

Questions from this subtopic

Each one with the model answer underneath.

1
What is aggregate demand?
Model answer
Aggregate demand is the total planned spending on an economy's goods and services at a given price level over a given period.
2
State the components of aggregate demand.
Model answer
Aggregate demand equals consumption plus investment plus government spending plus exports minus imports.
3
Which component of UK aggregate demand is the largest?
Model answer
Consumption, which accounts for roughly two-thirds of aggregate demand.
4
Why does the aggregate demand curve slope downwards?
Model answer
A lower price level raises the real value of money balances, tends to lower interest rates and makes domestic goods more competitive abroad, so planned spending rises.
5
Name four factors that influence consumption.
Model answer
Real disposable income, interest rates, consumer confidence and household wealth.
6
Explain how a rise in house prices affects consumption.
Model answer
Homeowners feel wealthier and can borrow against the higher value of their property, so they save less and spend more out of current income, which is the wealth effect.

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Scarcity, Choice and Potential Conflicts

Enterprise, Business and the Economy

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The Role of Credit in the Economy

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ABorrowing becomes dearer and saving more rewarding.

BMortgage holders have less disposable income left.

CSpending on credit-financed items falls.

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Wage rate means the amount an employer pays for one hour of work.

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