8/6/2019 Economics Page 244

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Rehman Mahmood

Economics Page 244

1) Aggregate demand is the total of all demands or expenditures in the economy at any givenprice. F ormula for Aggregate demand is C+I+G+(X-M).

2) D uring the period of 2000-2007 the percentage growth of consumer expenditure fell sharplyfrom 6% to as low as 1%. D uring this time period, the percentage change in investmentspending varied greatly. It continuously rose and fell over the 7 years from as low as -2% toas high as 10%. In contrast the percentage change in government spending remained stableat around 4%. The percentage change imports and exports remained generally the same andstable at around 5% until 2006 when both sharply fell to -15%. The rise and fall investmentsfollowed a similar pattern to the rise and fall in imports and exports. The low investmentsspending could be due to the high short term interest rates. Throughout the data it isapparent that consumer expenditure is high when G D P at market prices is low, however theopposite thing happens from 2005 to 2007.

Ultimately most components perform in a similar way to one another except fromgovernment and investment spending which are completely unique in their performance.

3) The main factors affecting aggregate demand over the period 2000-2007 are the interestrates, inflation and unemployment. F igure 8 shows that from the beginning of 2000 theinterest rates were very high and although they slowly fell below 4%, they rose once againand in 2007 ended up at almost 6% again. Because of the high interest rates, more peopleare likely to save their money rather than use it. Therefore expenditure is low and so is

aggregate demand. Another factor affecting aggregate demand is unemployment, if morepeople are out of work and are not getting paid there will be a lot less expenditure. Inflationalso effects aggregate demand and expenditure, if prices rise and wages do no rise

accordingly people will find that they cannot afford most things. This may also cause a fall inaggregate demand.

4) The world s economy downturn was caused by many factors such as exports, low interestrates and rising average house prices. These factors may cause a downturn average houseprices would cause a downturn in the UK s economy because of the low interest ratespeople would take out loans to buy new houses and as interest rates continued to increasethey were not able to pay back the loan.In conclusion the main reason for the downturn in the UK economy is because of the highaverage house prices and the rise in interest rates which means people could not pay back

their loans.