6) Evaluate AD changes -MMT Flashcards
the key component of AD is…
consumption (C) - this measures consumer expenditure
C will normally have a… relationship to Income (RDI)
positive
C will normally have a positive relationship to Income (RDI) therefore if RDI increases, C will…
increase
C will normally have a positive relationship to Income (RDI) therefore if RDI decreases, C will…
decrease
the unknown factor is by HOW MUCH an increase in RDI will increase C, this depends on the…
leakages
a change in C will vary according to your…
1) circumstances
2) expectations
3) Consumer confidence
the key point is that the link between a change in RDI and a change in C will vary according to your…
circumstances
how does a change in C varying due to circumstances apply to countries as a whole?
an increase in the RDI levels of Chad may lead to a much higher rate of increase in C than a similar increase in Japan
the increase in C that results from an increase in RDI (Y) will depend on the size of the…
leakages
how could the relationships of C and RDI work in reverse?
an increase in C should increase RDI as local businesses are earning more,again, the amount of any increase depends on the leakages
what is an example of expectation?
if Mr Webb was reading in his newspaper everyday that energy prices were going to soar, he might prefer to save more and forego extra-spending
expectations are known as…
consumer confidence
consumer confidence is a… influence on C
major
why is consumer confidence a major influence on C?
if consumers are confident that their RDI’s are likely to be on the increase, C will increase by a lot; if consumer confidence is negative then C may actually decline as consumers save their money for bad times ahead
what can business confidence cause?
if business confidence is high, then Investment (I) will increase significantly; if business confidence is negative then I will fall
