11 Economics Name: ___________________

Ch. 14: Aggregate Demand Quiz

1. Draw an aggregate demand diagram, labeling the axis correctly. (1)

Price

Real GDP
2. Define Aggregate Demand and list its components. (2)

Aggregate demand is the total demand of a country’s goods and services at a given price
level at a given time period.
AD= C+I+G+ (X-M)
3. For each of the following, state the effect it would have on the aggregate demand of Indonesia’s economy –using the
chart below. In the first column, state whether the event will increase AD (causing a shift to the right) or decrease AD
(shift left). In the second column, state which component of AD is most affected. And in the final column, explain why.
(9)

Event + or - Component Explanation

The RI government lowers tariffs (import taxes) on
foreign foods.
The RI government decides to provide free public
education up to 12th grade.
M Lowering import taxes means that
- people will increase their spending on
imports rather than on products made
within the economy.
G Government increases its spending, thus
+ increasing the GDP.

X If local currency weakens, there is often

The local currency weakens (e.g. Rp. from 14 500 to
16 500) against those of neighboring nations
The RI government proposes large spending cuts to
its military.
Housing prices shoot up to record levels.
+ increased exports being purchased by
foreign countries, thus increasing GDP.
G Government decreases its spending,
- thus reducing the GDP (unless it moves
its spending on another aspect within
the economy).
C Consumers will be less likely to purchase
- houses when housing prices shoot up.

C If income taxes increase, consumers

The government increases household income
taxes.
Statistics on the local economy are released
increasing business confidence.
Indonesia economy remains fine …but the global
economic crisis lowers foreign incomes.
A NGO introduces a program providing credit to
small farmers, making it easier for farmers to
- would have decreased money to spend
on goods and services within the
economy.
+ I Businesses will have increased
motivation to begin production and sales
of their products.
- M Indonesia may have increased imports
during this time, which will lead to a
reduction in GDP.
I Farmers will have access to more
+ resources, which will help them in the
 borrow to finance the building of irrigation projects production of their goods and services.

4. Using a diagram, explain how and why a change in interest rates is likely to affect the level of aggregate demand in a
country. (4)

With higher interest rates, consumers will have greater

purchasing power, as they have access to higher funds and
credit. Because of this, increased interest rates often lead
Price to an increase in production and demand of products
within an economy. When this occurs and sales increase,
the GDP of an economy will increase as well.

Real GDP