The characteristics of AD
Consumption (C)
Investment (I)
Government expenditure (G)
Net trade balance (X−M)
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Exam-Style Practice Questions
Define the term ‘aggregate demand’. (2 marks)
Two marks means two separate things to say, and the second must not be a rewording of the first. Settle first what KIND of quantity this is, because everything else follows from that choice. Aggregate demand is the total planned spending on a country’s own output (1 mark), measured at each price level over a period of time (1 mark). An answer that says "the total demand in an economy" has restated the words of the term without giving either of them, and one that says "everything that is bought" describes an outcome rather than a plan.
Draw an aggregate demand diagram to show the effect of a fall in consumer confidence. (4 marks)
Decide before you draw whether confidence is on one of your axes. It is not, so this is a shift and not a movement, and the diagram has to show two curves rather than two points on one. Axes labelled price level and real output (1 mark); an original downward-sloping curve labelled AD₁ (1 mark); a second curve to the LEFT of it labelled AD₂ (1 mark); and the new, lower level of real output read off at an unchanged price level (1 mark). Naming the component that moved — consumption — beside the arrow costs you nothing and makes the diagram answer the question rather than illustrate the topic.
An economy has disposable income of $900bn and a savings ratio of 18%. Investment is $200bn, government expenditure is $250bn, exports are $300bn and imports are $360bn. Calculate aggregate demand. (4 marks)
This is three short steps rather than one long one, and each of them can be written on its own line. Work out what is saved, then what is left to be consumed, then put the identity together. Saving is 18% of $900bn = $162bn (1 mark). Consumption is $900bn − $162bn = $738bn (1 mark). The net trade balance is $300bn − $360bn = −$60bn (1 mark). Aggregate demand is $738bn + $200bn + $250bn − $60bn = $1,128bn (1 mark). Adding the trade figures rather than subtracting them is the error that costs the last two steps.
Explain how a rise in interest rates is likely to affect consumption. (4 marks)
Explain asks for a chain rather than a list, and the chain here has two links. Choose ONE of the two channels and follow it properly rather than naming both and developing neither. The first link is the effect on households: a higher rate raises the interest paid on existing and new borrowing, and raises the reward for saving (1 mark), with development showing that this leaves less available to spend (1 mark). The second link takes it to the component: consumption falls (1 mark), so aggregate demand is lower at every price level and the curve shifts left (1 mark). An answer that stops at "borrowing is dearer" has given one link of two.