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2 (a) Which one of the following would be most likely to cause aggregate demand to increase? A fall in: A government spending B net trade (X-M) C the marginal propensity to consume D the marginal propensity to save (b) Draw an aggregate demand and aggregate supply diagram illustrating the likely impact of a rise in interest rates on the price level and real output. - Edexcel - A-Level Economics A - Question 2 - 2018 - Paper 2
Question 2
2 (a) Which one of the following would be most likely to cause aggregate demand to increase? A fall in: A government spending B net trade (X-M) C the marginal prop... show full transcript
Worked Solution & Example Answer:2 (a) Which one of the following would be most likely to cause aggregate demand to increase? A fall in: A government spending B net trade (X-M) C the marginal propensity to consume D the marginal propensity to save (b) Draw an aggregate demand and aggregate supply diagram illustrating the likely impact of a rise in interest rates on the price level and real output. - Edexcel - A-Level Economics A - Question 2 - 2018 - Paper 2
Step 1
Which one of the following would be most likely to cause aggregate demand to increase?
Answer
The only option that would likely cause an increase in aggregate demand (AD) is:
D the marginal propensity to save.
A decrease in the marginal propensity to save means consumers are more likely to spend a larger share of their income. This increased consumption directly raises aggregate demand.
In contrast:
- A (government spending): A fall in government spending will likely decrease AD.
- B (net trade): A fall in net trade would result in lower exports relative to imports, causing AD to decrease.
- C (the marginal propensity to consume): A decline here would also decrease AD as less consumption occurs.
Step 2
Draw an aggregate demand and aggregate supply diagram illustrating the likely impact of a rise in interest rates on the price level and real output.
Answer
To illustrate the impact of a rise in interest rates:
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Axes and Labels: Draw the vertical axis as the 'Price Level' and the horizontal axis as 'Real Output'.
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Curves: Draw the downward sloping AD curve and the upward sloping Aggregate Supply (AS) curve.
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Shift: Indicate a shift of the AD curve to the left, showing the likely decrease in aggregate demand due to higher interest rates. This shift results in a lower equilibrium price level and less real output.
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Example: Present the initial and new equilibrium points, where the price level decreases and real output falls due to increased interest rates.