Consumption Investment Flashcards
What does AD consist of spending by?
Consumption (C), investment (I), government spending (G) and export - import (X-M)
What is the formula for AD?
AD = C+G+X-M
Why do we have to add exports?
It is the demand for other countries for the UK products
Why do we have to subtract imports?
It is the demand for UL households and firms for foreign products
What is the consumption function?
C=a+bYd
What is C in the consumption function?
The level of consumption spending
What is a in the consumption function?
The autonomous consumption
What is b in the consumption function?
The marginal propensity to consume
What is Yd in the consumption function?
The disposable income (income after tax)
What is the axis on a consumption function?
Consumption on the vertical and income on the horizontal
What are the determinants of consumption spending?
Distribution of income, availability and cost of credit, wealth effect, age distribution, expectations and permanent income
What is autonomous consumption?
The amount of spending independent of incomes
What happens if income is zero?
The amount will still be spent (dissaving)
What is dissaving?
Borrowing or using previous savings
What is marginal propensity to consume (MPC)?
The amount of extra spending out of an extra pound
What is the formula for MPC?
MPC = change in consumption spending / change in income
What does MPC depend on?
Interest rates, expectations of future price increase, expectations of future stats of the economy and income levels
What is disposable income (Yd)?
Income left over after taxes have been paid - household income that is available to consume or to save
What is average propensity to consume (APC)?
Average consumption spending out of every pound of income
What is the formula for APC?
APC = c / Yd
Where does most consumer spending go towards?
Housing, water, electricity, gas and other fuels
When does investment occur?
When firms make a decision to allocate resources into projects that will generate future returns
What is investment?
The purchase of capital goods and is an injections into the economy
What are the different types of investments?
Gross, depreciation and net
