AD influence analysis

Question 1

An increase in real disposable income on Consumer Expenditure.

Answer 1

If total disposable income increases, households will be able to afford to buy more products with their income and are likely to increase their total spending on goods and services.

Question 2

An increase in wealth on consumer expenditure

Answer 2

If the wealth of households increases, higher value of assets(such as houses) can be used to secure more borrowing. Households are likely to be able to borrow more and afford to spend more on goods and services, increasing consumer expenditure.

Question 3

An increase in consumer confidence on consumer expenditure

Answer 3

Confident consumers tend to save less and spend more, as a proportion of their income. If households feel they need to save less, as they are confident future incomes are more secure, it will lead to an increase in total household spending.

Question 4

A fall in rates of interest on consumer expenditure

Answer 4

A fall in the rate of interest will make borrowing cheaper, as proportionally less money is paid in interest on loans; saving will be less rewarding at lower rates of interest, as less is received in proportion as interest on savings. Households are likely to borrow more and save less, leading to an increase in total consumer spending on goods and services.

Question 5

Expectations of inflation on consumer expenditure

Answer 5

If households expect the price level in an economy to rise at faster rate in future (increasing inflation), households may feel it would be cheaper to buy goods and services before prices rise. This may lead to an increase in total spending on goods and services by households.

Question 6

An increase in the level of real disposable income on investment

Answer 6

Firms operating in an economy where there is an increase in real disposable income of households are more likely to purchase more capital goods, increasing investment. They anticipate increased demand for products and seek to increase capacity by buying more capital goods (machinery, factories, offices…)

Question 7

An increase in current profit levels on investment

Answer 7

When current profit levels increase, firms’ income increases and the amount firms can afford spend on new capital goods increases. Firms are likely to spend more on acquiring new capital goods, increasing investment.

Question 8

A fall in corporation tax rates on investment

Answer 8

If corporation tax rates fall, firms will retain more profit; the government is taking less from firms’ profits in tax. Firms will be able to afford to spend more on capital goods, the total spending by firms on capital is likely to increase, increasing investment.

Question 9

A fall in the rate of interest on investment

Answer 9

A fall in the rate of interest rate would normally reduce the price of loans for firms, reducing the rate of return required to finance the buying of capital. If firms expect more capital spending to be profitable in future, they will increase spending on capital goods, increasing investment.

Question 10

Faster rate of advances in technology on investment

Answer 10

If use of the latest technology increases overall productivity, firms would be able to produce goods and services at a lower unit (average) cost. Firms have a greater incentive to buy new capital goods when the new capital will increase profitability. Firms will buy more capital, increasing investment.

Question 11

A fall in the price of capital equipment on investment

Answer 11

If the price of capital equipment falls, firms are more likely to be able to afford to buy more capital. Increasing profitability of using capital provides firms with a greater incentive to buy capital goods, increasing investment.

Question 12

When there is a significant reduction in spare capacity on investment

Answer 12

If firms are utilising a high proportion of existing capital they are more likely to increase spending on capital goods, in response to an increase in demand for products. Replacing ‘worn-out’ capital will also be more likely when there is a high level of capital in use in an economy. Firms are likely to increase spending on capital goods, increasing investment.

Question 13

Increasing business confidence (expectations of increasing profits in future) on investment

Answer 13

Firms may become increasingly confident about the level of future economic activity. If firms expect increasing profitability in future, they are likely to want to increase capacity to earn even higher profits. Firms will increase spending on capital goods, increasing investment.

Question 14

The amount of tax revenue being raised on government spending

Answer 14

If the amount of taxation revenue is increasing, generating increasing income for government, the government is likely to be able to afford to increase public spending on goods and services.

Question 15

Previous spending commitments by government on government spending

Answer 15

If the government had previously made commitments to increase spending in future, this may increase government expenditure on goods and services.

Question 16

An increase in the level of borrowing the government is prepared to undertake on government spending

Answer 16

The higher the level of borrowing the government is prepared to undertake, the more it is likely to spend; the government have more money to be able to spend when it decides to borrow more. Increasing borrowing will often lead to an increase in public spending on goods and services.

Question 17

Policy decisions to influence macroeconomic performance on government spending

Answer 17

The government may decide to introduce a fiscal policy to stimulate total spending in the economy; an increase in government spending could be used in an attempt to boost aggregate demand(AD) and economic growth.

Question 18

An increase in the level of intervention required to correct for market failure on government spending

Answer 18

If anew government feels market failure is common, it is more likely to want to provide more goods and service. If the government feels that markets fail to provide appropriate quantities of goods and services (such as, health and education services), there will be an increase in the level of public spending on goods and services.

Question 19

Fall in real disposable income at home (domestic)

Answer 19

A fall in real disposable income in the domestic economy will lead to fall in spending on all goods and services, including imports(spending on goods and services produced outside the domestic economy). Net exports (X-M) are likely to improve when total imports (M) fall.

Question 20

An increase in disposable income abroad (foreign)

Answer 20

An increase in real disposable income abroad will usually lead to a higher level of spending by foreign consumers, firms and government, on goods and services. There is likely to be an increase in exports (domestically produced goods and services sold abroad). Net exports (X-M) are likely increase, when exports(X) increase.

Question 21

A fall in relative price of exports

Answer 21

If exports become relatively less expensive for foreign buyers, compared to products produced in the foreign economies, exports are likely to become more price-competitive. Total export (X) spending (spending on domestically produced goods and services by foreign households, firms and governments)is likely to increase, increasing net exports(X-M).

Question 22

An increase in relative price of imports

Answer 22

If imports (M) become relatively more expensive for domestic buyers, compared to products produced in the domestic economy, imports are likely to become less price-competitive. Demand for imports is likely to fall and total import (M) spending (spending on foreign produced goods and services by domestic households, firms and government)is likely to fall, increasing net exports(X-M).

Question 23

A depreciation (fall) of the exchange rate

Answer 23

A fall in the value of the domestic currency in terms of another/other currencies is likely to increase net exports (X-M) over time. A fall in the value of the domestic currency will make imports more expensive to holders of domestic currency (as they have to sell more domestic currency to buy the foreign currency required to buy imports). Holders of foreign currency will be able to buy more domestic currency; the price of exports to foreign buyers will fall. There should be an increase in the demand for exports and the total value of exports should rise. There should also be a fall in the total value of imports, net exports (X-M) should increase.* This effect is dependent on exports and imports having some responsiveness to changes in price (PED for imports and exports), we will assume trade is undertaken in competitive markets and there is sufficient responsiveness to changes in price.