Consumption Investment

Question 1

What does AD consist of spending by?

Answer 1

Consumption (C), investment (I), government spending (G) and export - import (X-M)

Question 2

What is the formula for AD?

Answer 2

AD = C+G+X-M

Question 3

Why do we have to add exports?

Answer 3

It is the demand for other countries for the UK products

Question 4

Why do we have to subtract imports?

Answer 4

It is the demand for UL households and firms for foreign products

Question 5

What is the consumption function?

Answer 5

C=a+bYd

Question 6

What is C in the consumption function?

Answer 6

The level of consumption spending

Question 7

What is a in the consumption function?

Answer 7

The autonomous consumption

Question 8

What is b in the consumption function?

Answer 8

The marginal propensity to consume

Question 9

What is Yd in the consumption function?

Answer 9

The disposable income (income after tax)

Question 10

What is the axis on a consumption function?

Answer 10

Consumption on the vertical and income on the horizontal

Question 11

What are the determinants of consumption spending?

Answer 11

Distribution of income, availability and cost of credit, wealth effect, age distribution, expectations and permanent income

Question 12

What is autonomous consumption?

Answer 12

The amount of spending independent of incomes

Question 13

What happens if income is zero?

Answer 13

The amount will still be spent (dissaving)

Question 14

What is dissaving?

Answer 14

Borrowing or using previous savings

Question 15

What is marginal propensity to consume (MPC)?

Answer 15

The amount of extra spending out of an extra pound

Question 16

What is the formula for MPC?

Answer 16

MPC = change in consumption spending / change in income

Question 17

What does MPC depend on?

Answer 17

Interest rates, expectations of future price increase, expectations of future stats of the economy and income levels

Question 18

What is disposable income (Yd)?

Answer 18

Income left over after taxes have been paid - household income that is available to consume or to save

Question 19

What is average propensity to consume (APC)?

Answer 19

Average consumption spending out of every pound of income

Question 20

What is the formula for APC?

Answer 20

APC = c / Yd

Question 21

Where does most consumer spending go towards?

Answer 21

Housing, water, electricity, gas and other fuels

Question 22

When does investment occur?

Answer 22

When firms make a decision to allocate resources into projects that will generate future returns

Question 23

What is investment?

Answer 23

The purchase of capital goods and is an injections into the economy

Question 24

What are the different types of investments?

Answer 24

Gross, depreciation and net

Question 25

What is gross investment?

Answer 25

Total investment in an economy in a period

Question 26

What is depreciation investment?

Answer 26

Investment to replace equipment or machinery that has worn out

Question 27

What is net investment?

Answer 27

Investment in new assets that increases the capital stock

Question 28

What are the determinants of investment?

Answer 28

Interest rate, initial cost of capital projects, availability of funds, expected returns from the investment, alternatives available, risk and culture, non-financial factors and government policy

Question 29

What does an increase in investment affect?

Answer 29

AD (increases spending) and AS (increases the productive capacity)