Aggregate Demand - Consumption Flashcards

1
Q

What is disposable income

A

Income that a consumer actually has to spend after tax

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2
Q

As disposable income rises , we would expect consumption to ______

A

Rise

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3
Q

What is marginal propensity to consume

A

The proportion of additional consumption devoted to spending rather than saving

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4
Q

Generally, _______-income consumers spend a larger proportion of their income, so they will have a _________ marginal propensity to consume than those on _________ incomes

A

Lower
Greater
Higher

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5
Q

Households saving and spending and spending are _________ related: the more you save, the less you have to spend

A

Inversely

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6
Q

What is the household savings ratio

A

The (average) proportion of disposable income that is saved rather than spent on consumption across the economy

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7
Q

If the household savings ratio increases, we would expect consumption to _______

A

Fall

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8
Q

Determinants of consumer spending

A

Interest rates
Consumer confidence
Wealth effects

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9
Q

How do interest rates determine consumer spending?

What happens when interest rates are high?

A

At high interest rates, saving becomes more appealing and borrowing becomes more costly, so consumption is likely to fall

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10
Q

How does consumer confidence determine consumer spending

A

If consumer confidence is high - due to optimism. consumption is likely to rise

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11
Q

How does wealth determine consumer spending

A

Increases in the value of people’s assets is another factor that can increase consumption, as people feel wealthier. This is related to the consumer confidence idea

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