Fig. 1 shows the components of planned aggregate demand in the economy of Lydora. IncomeConsumptionInvestmentGovernmentExportsAD© EAGLE BEACON GLOBAL (a) Wh...

Assessment: Economics 9214 | Paper 2 Mock 01 | Written Paper 2 Subject: Economics - 9214

Question 1 Report

Fig. 1 shows the components of planned aggregate demand in the economy of Lydora.

IncomeConsumptionInvestmentGovernmentExportsAD© EAGLE BEACON GLOBAL

(a) What is meant by aggregate demand? [1]
(b) Explain why a decrease in interest rates may increase investment. [2]

Answer Details

(a) Aggregate demand is the total planned spending on goods and services in an economy at a given price level, or over a given period. It includes consumption, investment, government spending and net exports. [1]

(b) A fall in interest rates reduces the cost of borrowing. Firms may therefore find it cheaper and more worthwhile to borrow money to buy capital goods, such as machinery or vehicles. This increases investment. [2]

Examination reminder: Link the interest-rate change to borrowing costs, then to firms' spending on capital goods.

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