AS/AD

Question 1

Determinants of consumption

Answer 1

RDY - high incomes spend more as more RDY
Wealth - if have high value assets, feel more confident to sonsume - could sell asset if need be

IR - if IR low, less saving and more C

Inflation - if people expect prince level to rise in future, will spend more in present

Distribution is income - poorer people consume large proportion of their income than richer people

Question 2

Eval of determinants of consumption

Answer 2

RDY - rich people save higher proportion of income as harder to spend all their money

Wealth - assists often illiquid and have volatile prices - won’t increase confidence

IR - pensioners don’t work so if IR falls, won’t increase C
If people believe IR will fall, they will delay borrowing
If recession, confidence low

Inflation - if high for too long, C decreases
Gov may increase IR to solve it which reduces borrowing and increases saving

Distribution of income- rich people have more confidence to consume

Question 3

Determinants of government spending

Answer 3

• level of economic activity - during your recession the government spend more as unemployment is high
• Market failure - will spend if they believe market isn’t working efficiently
• Desire to electorate - they want to please voters so they can get elected
• International circumstances - war may cause government spending to increase
• Ideological prioritisation of economic objectives - each country has different priorities for government

Question 4

Eval of Determinants of government spending

Answer 4

• level of economic activity - can only increase spending if they can afford it - if people are unemployed, they have less tax revenue
• Market failure - is a value judgement. Different people may view the level of failure differently.
• Desire to electorate - They can’t spend as much as they want to because of democracy in many countries
• International circumstances - neutral countries will not invest in the military