11:24 .I LTE Aggregate-Demand-consolidation-exercise A . . . Aggregate Demand: consolidation exercise 1. Give definitions to the following: I. I Consumption: 1.2 Aggregate demand 1.3 Wealth: 2. Multiple choice Question Possible answers Key A The government payment of state pensions. Which of the following activities 2. 1 is classified as investment in B The purchase of shares using personal savings Economics? C The installation of equipment to increase the output of computer chips. A An increase in the level of savings. A fall in the rate of interest may 2.2 directly result in B Higher levels of investment C An increase in government expenditure. Which of the following is most A A fall in house prices. 2.3 likely to increase the level of B A cut in the rate of value added tax (VAT) to 15%. consumption? C A rise in the level of saving. 3. Data response ESSENTIALS RISING... PROPERTY VALUES FALLING... Bank of England Interest Rates 25 Nov 08 - July 09 20 5.0 15 10 4.5 Petrol Food House prices 10.6% -8.1% 4.0 24% 3.5 SOURCE: ONS SOURCE: Na 3.0 HOUSE PRICES OVER THE LAST YEAR Annual change % -Halifax Nationwide 0.5% 12- 20 Historic low March to 1.5 July 09 10 05 -8 0- -12- Nov Dec Jan Feb Mar Apr May Jun Jul Jun 07 07 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 08 09 08 SOURCE: Bank of England 3. 1 Describe the trend in the housing market from June 2007 to February 2008. 3.2 Explain how this trend might impact on USA's level of aggregate demand. 3.3 Evaluate the impact of all the information given on the level of aggregate demand in the US in 2008. www.a-zbusinesstraining.com 63. ANSWERS: Aggregate Demand: consolidation exercise 1.I Total planned household spending on goods and services. 1.2 Total demand for goods and services produced in the economy at any given price level. AD = C + | + G + X - M 1.3 The value of household assets, such as their house, shares or bonds. Do not confuse this with income, a flow of money, as wealth is the stock of money held by a household. 2.1 C 2.2 B 2.3 B@ ..| LTE C} March [0 l 1.5 July 09 Q a I .0 4 0.5 -G 0 42 ' Nov Dec Jan Feb Mar Apr MayJun Jul Juli N M 50g 0d Nov Dec Jm Feb \"U M May Jul 08 09 07 07 07 07 07 07 07 (I on I\" N on DI SOURCE: Bank of Eng!\" 3.| Describe the trend in the housing market from lune 2007 to February 2003. 3.2 Explain how this trend might impact on USA's level of aggregate demand. 3.3 Evaluate the impact of all the information given on the level of aggregate demand in the US in 2008. 63. ANSWERS: Aggregate Demand: consolidation exercise I.| Total planned household spending on goods and services. I.2 Total demand for goods and services produced in the economy at any given price level. AD = C + I + G + X - M L3 The value of household assets. such as their house. shares or bonds. Do not confuse this with income. a flow of money. as wealth is the stock ofmoney held by a household. 2.2 B 2.3 B 3.| US house prices consistently grew over this period but at a slower and slower annual rate, from a maximum annual growth rate of I294 to a minimum of around 3%. 3.2 Rising US house prices would increase household wealth, causing a positive wealth effect. This will increase consumer condence and consumer spending, thereby leading to a rise in aggregate demand, as consumption is a component of AD. 3.3 Rising food and petrol prices suggest that inflation is rising and so real incomes are falling (or growing less quickly), hence reducing consumption (or the rate of increase) and thus shifting AD into the left (or a smaller shift to the right). Lower house prices will have a negative wealth effect. reducing condence and so reducing consumption and thus AD. Both of these effecu together suggest AD falling. However a cut in US interest rates from 4.5% to 3% will lower borrowing costs and so reduce mortgage repayments. and so increase consumption. Cheaper borrowing should also encourage more spending on consumer durables and less saving. adding to this effect. Investment should also rise as cheaper borrowing will raise the protability of investment and so increase investment. and thus AD also. Which of these two effects dominates is difcult to say from the data. and so evaluation may consider what is happening to the other components of AD. like net exports and thus overseas growth and the value of Sterling. Evaluation might also consider me importance of US house prices, with two thirds of households owning a house. and thus falling prices signicantly affecting consumption and AD. Evaluation might also point to the time lagged impact of an interest rate cut of around IB months. and thus any cut will take time to fully feed through to AD, perhaps making a fall in AD most likely in the short-run until interest rate cuts fully alter rms' investment plans and household spending patterns