Determinants Of AD Flashcards
State Formula of AD
C+I+G+(X-M)
What is (Aggregate) Consumption
spendings by all households in the economy on consumer goods and services
when hh make descisions whether to spend or not on consumer goods and services they are simultaneously
decideding whether to save or not
a determinant of consumption is also a determinant of
household saving
When we assume a closed economy we assume there are
no exports or imports - and that there is no taxation
when we assume there is a closed economy what can hosueholds do
only two things : spend or save
Spending income is
consumption
not spending income is
saving
Factors influencing consumption
IR Level of Income expected future income wealth consumer confidence availability of credit
What does the rate of interest do
rewards savers for sacrificing current consumption
The higher the IR
The greater the reward
At any particular income if the IR rises
the amount saved will increase
the amount consumed will fall
what is the most important and the main determinant of Consumption and Saving
level of income
The level of income aka
keynesian theory of consumption and saving
level of income/keynesian theory says as income rises ….
although absolute consumption rises
consumption falls as a fraction of total income
while the fraction saved increases
