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Try
your
best
to
answer
the
questions
on
each
page
and
then
check
your
answer.
If
you
need
to,
do
the
question
again
to
get
a
closer
match.
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when
you
are
ready.
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Question
1
What
are
the
components
of
Aggregate
Demand?
Check
answer.
The
components
of
AD
are
-
Consumption
-
the
spending
on
all
goods
and
services
by
households.
-
Investment
-
the
buying
of
capital
goods
by
firms.
-
Government
spending
on
public
and
private
goods
and
services.
-
Net
exports
-
Export
receipts
minus
import
payments.
Next
Question.
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WINDOW
Question
2
Using
the
diagram
explain
how
an
increase
in
income
would
impact
on
employment.
Check
answer.
Describe:
Aggregate
Demand
is
the
total
demand
for
all
goods
and
services
produced
in
an
economy
in
a
year.
A
Recessionary
Gap
is
when
the
equilibrium
of
point
of
AD
=
AS
is
below
full
employment.
Explain:
An
increase
in
INCOME
may
cause
an
increase
in
consumption
which
will
cause
AD
to
increase
(shift
right)
because
Consumption
is
a
component
of
AD
if
consumption
increases
then
AD
will
increase
causing
a
recessionary
gap
to
decrease.
Relate:
So
AD
increases
from
AD1
to
AD2
and
the
average
price
level
increases
from
PLe1
to
PLe2,
output
increases
from
Ye1
to
Ye2,
causing
employment
to
increase
and
reducing
the
recessionary
gap
and
unemployment.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce
.
CLOSE
WINDOW
Question
3
Using
the
diagram
explain
how
a
decrease
in
consumption
could
cause
an
increase
in
unemployment.
Check
answer.
Describe:
Aggregate
Demand
is
the
total
demand
for
all
goods
and
services
produced
in
an
economy.
A
Recessionary
Gap
is
when
the
equilibrium
of
point
of
AD
is
equal
to
AS
is
below
full
employment.
Explain:
An
decrease
in
CONSUMER
SPENDING
caused
by
will
cause
AD
to
decrease
(shift
left)
because
Consumption
is
a
component
of
AD
if
consumption
decreases
then
AD
will
decrease
causing
a
recessionary
gap
to
increase.
Relate:
So
AD
decreases
from
AD1
to
AD2
and
the
average
price
level
decreases
from
PLe1
to
PLe2,
output
falls
from
Ye1
to
Ye2,
causing
employment
to
decrease
and
creating
a
recessionary
gap
and
unemployment.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce
.
CLOSE
WINDOW
Question
4
Using
the
diagram
explain
how
a
decrease
in
investment
would
impact
on
Aggregate
Demand.
Check
answer.
Describe:
Aggregate
Demand
is
the
total
demand
for
all
goods
and
services
produced
in
an
economy.
A
Recessionary
Gap
is
when
the
equilibrium
of
point
of
AD
is
equal
to
AS
is
below
full
employment.
Explain:
An
increase
in
GOVERNMENT
SPENDING
will
cause
AD
to
increase
(shift
right)
because
Government
Spending
is
a
component
of
AD
if
Government
Spending
increases
then
AD
will
increase
causing
the
recessionary
gap
to
decrease.
Relate:
So
AD
increases
from
AD1
to
AD2
and
the
average
price
level
increases
from
PLe1
to
PLe2,
output
increases
from
Ye1
to
Ye2,
causing
employment
to
increase
and
reducing
the
recessionary
gap
and
unemployment.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce
.
CLOSE
WINDOW
Question
5
Using
the
diagram
explain
how
a
decrease
in
transfer
payments
would
impact
on
Employment.
Check
answer.
Describe:
Aggregate
Demand
is
the
total
demand
for
all
goods
and
services
produced
in
an
economy.
A
Recessionary
Gap
is
when
the
equilibrium
of
point
of
AD
is
equal
to
AS
is
below
full
employment.
Transfer
payments
are
payments
made
to
households
from
the
Government.
Explain:
A
decrease
in
Transfer
Payments
will
cause
a
decrease
in
household
incomes
and
consumption
causing
AD
to
decrease
(shift
left)
because
Consumption
is
a
component
of
AD
if
consumption
decreases
then
AD
will
decrease
causing
the
recessionary
gap
to
increase.
Relate
:
So
AD
decreases
from
AD1
to
AD2
and
the
average
price
level
decreases
from
PLe1
to
PLe2,
output
decreases
from
Ye1
to
Ye2,
causing
employment
to
decrease
and
increasing
the
recessionary
gap
and
unemployment.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce
.
CLOSE
WINDOW
Question
6
Using
the
diagram
explain
how
a
decrease
in
apple
exports
and
receipts
will
affect
unemployment.
Check
answer.
Describe:
Aggregate
Demand
is
the
total
demand
for
all
goods
and
services
produced
in
an
economy.
A
Recessionary
Gap
is
when
the
equilibrium
of
point
of
AD
is
equal
to
AS
is
below
full
employment.
Apple
export
receipts
are
payments
made
to
producers
from
the
overseas
sector
in
return
for
exports
sent
overseas.
Explain:
A
decrease
in
Apple
export
receipts
will
cause
a
decrease
in
exports
and
producer
revenue
and
production
causing
AD
to
decrease
(shift
left)
because
Exports
are
a
component
of
AD
if
exports
decrease
then
AD
will
decrease
causing
the
recessionary
gap
to
increase.
Relate
:
So
AD
decreases
from
AD1
to
AD2
and
the
average
price
level
decreases
from
PLe1
to
PLe2,
output
decreases
from
Ye1
to
Ye2,
causing
employment
to
decrease
and
increasing
the
recessionary
gap
and
unemployment.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce
.
CLOSE
WINDOW
Question
7
Compare
and
contrast
the
effects
on
employment
of
a
decrease
in
apple
export
receipts
with
a
decrease
in
consumption.
Check
answer.
Describe:
Aggregate
Demand
is
the
total
demand
for
all
goods
and
services
produced
in
an
economy.
Consumption
is
the
buy
of
commodities
by
households.
Apple
export
receipts
are
payments
made
to
producers
from
the
overseas
sector
in
return
for
exports
sent
overseas.
Explain:
A
decrease
in
Apple
export
receipts
will
cause
a
decrease
in
exports
and
producer
revenue
and
production
causing
AD
to
decrease
(shift
left)
because
Exports
are
a
component
of
AD
if
exports
decrease
then
AD
will
decrease
causing
the
recessionary
gap
to
increase.
Relate
:
So
AD
decreases
from
AD1
to
AD2
and
output
decreases
from
Ye1
to
Ye2,
causing
employment
to
decrease
and
increasing
the
recessionary
gap
and
unemployment.
A
decrease
in
consumption
will
cause
a
much
larger
fall
in
AD
because
consumption
is
the
spending
on
commodities
by
all
households
and
so
will
affect
many
different
producers
and
not
just
apple
exporters,
because
consumption
is
a
component
of
AD,
AD
wil
fall
from
AD1
to
AD3
causing
a
larger
increase
in
unemployment,
from
Ye1
to
Ye3
and
so
a
larger
recessionary
gap.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce
.
CLOSE
WINDOW
Question
8
Using
the
diagram
explain
how
an
increase
in
interest
rates
would
impact
on
Aggregate
Demand.
Check
answer.
Click
to
enlarge
image.
Click
and
hold
to
reduce
.
Interest
rates
are
the
cost
of
borrowing
money.
An
increase
in
interest
rates
would
cause
consumer
borrowing
and
firms
borrowing
to
fall.
This
would
cause
a
fall
in
consumption
and
investment.
Consumption
and
investment
are
components
of
Aggregate
Demand.
A
decrease
in
consumer
spending
and
investment
will
cause
AD
to
shift
to
the
left
to
AD3
and
cause
a
decrease
in
output
/
incomes
from
Y
to
Y3,
causing
an
increase
in
the
recessionary
gap
and
a
decrease
in
the
price
level
from
PLe
to
PLe2.
Previous
Question.
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