consumption + AD Flashcards
aggregate demand
total demand in an economy, the total of all expenditure in a country at a given price
how to calculate GDP
C+I+G+(X-M)
consumption
+investment
+govs spending
+(exports-imports)
what is national expenditure measured in
GDP
how much of consumption accounts for AD
60-65%
what is consumption
the spending on consumer goods and services over a period of time
what effects the rate of consumption
- change in the prices of houses
- change in the value of stocks and shares
what is wealth effect
wealth of households increase then the rate of consumption increases; spending more and stimulating the broader economy
consumers feel more financially secure due to the rise in their asset values, such as corporate stock prices or home values.
how can an expectations of increase in inflation increase consumption
eg house prices are expected to rise, people will be tempted to bring forward their purchases
increase consumption and reduce saving
how can an expectations of increase in inflation decrease consumption
rising inflation erodes the real value of money wealth
households react by attempting to restore the real money of their wealth and save more by decreasing consumption
how can an expectations of increase in interest rates decrease consumption
increase in interest rates lead to
- increase mortgage payments cutting in spending
- reduces the value of stocks on stock market reducing household wealth leading to the fall in consumption
how can an expectations of an increase in the availability of credit increase consumption
it determines the price of credit, as credit is more wildly available it will increase consumption
how can expectations and consumer confidence effect consumption
high confidence
-with more income available households often choose to build up their stocks of savings in preparation for retirement
Low Confidence
-consumers are pessimistic or uncertain about the future, they tend to save more and spend less, potentially leading to a decrease in demand and economic slowdown
what is consumption function
the relationship between income and consumption
what is Marginal Propensity to Consume MPC
the proportion of a change in income that is spent on the consumption of goods and services; as opposed to being saved
MPC calculation
change in consumption/
change in income
If a household receives an additional $100 in income and spends $80 of it, what is the MPC?
The MPC is 0.8.
True or False: An MPC of 1.0 means that all additional income is saved.
False.
Fill in the blank: If a person has an MPC of 0.6, they will save _____ of their additional income.
0.4.
In a scenario where income increases from $2,000 to $2,500 and consumption increases from $1,600 to $2,000, what is the MPC?
The MPC is 0.8.
what effects gov spending
an increase in gov spending with no change in taxation will lead to a fall in budget surplus increasing aggregate demand
what are consumption influences
- wealth effects
- the availability of credit
- inflation
- consumer confidence
- composition of households
what increases investment
- business confidence
- fall in interest rate
- increase in company profitability
consumption function
difference between income and expenditure
MPS
marginal propensity to save, is the proportion of an increase in income that is saved rather than spent
how is MPS calculated
change in saving/
change in income
APS
Average Propensity to Save is the proportion of total income that is saved, typically expressed as a percentage of disposable income
APS calculation
dividing saving by income
What is the formula for calculating the marginal propensity to save (MPS)?
MPS = Change in Savings / Change in Income
True or False: The average propensity to save (APS) is calculated as total savings divided by total income.
True
If a household’s income increases from $50,000 to $60,000 and their savings increase from $5,000 to $10,000, what is the MPS?
0.5
Fill in the blank: The average propensity to save is calculated by dividing total savings by total _____.
income
What does a higher MPS indicate about a household’s saving behavior?
It indicates a greater proportion of additional income is being saved.
If a person saves $200 from a $1,000 income, what is their APS?
0.2 or 20%
Multiple Choice: Which of the following represents a scenario where MPS is equal to 0? A) Savings increase as income increases B) Savings remain constant as income increases C) Savings decrease as income increases
B) Savings remain constant as income increases
What is the relationship between MPS and the marginal propensity to consume (MPC)?
MPS + MPC = 1
If a household has total income of $80,000 and total savings of $16,000, what is their APS?
0.2 or 20%
True or False: An MPS of 0.75 means that 75% of any additional income is saved.
True
what is investment
addition to capitol stock of the economy
gross investment
measures investment before depreciation
net investment
takes depreciation into account
higher interest causes.. and why
means less investment because of
- increased cost of borrowing
- firms might have to postpone or cancel investment projects
- reduced projected profitability
- worsening in BOP can lead to a lower AD
lower interest rates leads to and why
higher investment because - reduced cost of borrowing, firms are able to undertake investment in capital goods such as machinery
- increased expected profitability
- improved business confidence
what is a key tool in expansionary monetary policy
- lower interest rates
aimed at boosting investment and overall economic activity
what has a lower reward for saving
lower interest rates as consumption will be higher
what 9 things effect investment
- actual + expected demand for goods and services
- cost of capital stock
- availability of credit
- business taxes/ retained profits
- business confidence (animal spirits)
- availability of suitable investment projects
- tech- pace of change
- risk
- gov intervention subsidies
accelerator theory
a rise in demand leads to a proportionally larger increase in investment spending than the capacity
accelerator theory real life explination
when an industry’s demand is rising quickly firms may respond initially by using their existing productive capacity more intensively or running down stocks of finished products
if high demand is expected they may increase spending on plant and machinery, factories, new tech to increase supply capacity
in accelerator theory changes in investment can be
directly linked to changes in the rate of GDP growth
gov. budget surplus
gov gains more in taxes than it uses on services (fiscal policy)
gov. budget deficit
gov has a negative balance as it spends more than it receives
what can gov spending be used to boost
spending by the multiplier effect
multiplier effect
when the initial injection into the circular flow causes a bigger final increase in GDP
eg of multiplier effect
if a business decides to invest and build a new factory
- company hired t build
- companies take on more workers
-workers spend more money
- other companies may need to take on more workers due to demand
- gov is getting in more revenue from taxes whilst paying out less in benefits which is more to invest
