Question

1. Explain in your own words why aggregate supply curve is upward sloping? Include graph with your answers.

2. Explain briefly the four major components of aggregate demand.

3. Explain in your own words the multiplier effects of government spending on Aggregate Demand. Include graph with your answer.

4. Explain in your own words how an increase in aggregate demand creates inflation. Include graph with your answer.

5. Describe in your own words how bank creates money.

Answer 1

1. Aggregate supply curve is upward sloping or positively sloped because of direct relationship between Y and P.

2. AD is the total demand of goods and services produced within the domestic territory of a country during one year. Components of AD are Consumption expenditure, investment spending, government expenditure and net exports.

a) Private Final Consumption Expenditure (C): It refers to expenditure on final goods and services by the individuals, households, and non-profit private institutions serving society. It includes: consumer services, consumer non durable goods and consumer durable goods.

b) Government final consumption expenditure (G): It refers to expenditure on final goods and services by the Government like expenditure on purchase of goods for consumption by the defence personnel.

c) Investment expenditure (I): It refers to expenditure on final goods and services by the producers. Example: expenditure by the farmers on the purchase of tractors or thrashers. It includes fixed investment and inventory investment.

d) Net exports (X – M) refers to the difference between exports and imports during an accounting year.