Determinants Of AD : consumption

Question 1

What is MPC

Answer 1

Willingness of households to spend any extra income they earn

Question 2

In Level of REAL disposable income what does real mean ?

Answer 2

adjusted for inflation

Question 3

in the level of real DISPOSABLE income what does disposable income mean>

Answer 3

income left after taxes and NI

Question 4

What’s one reason level of disposable income can increase

Answer 4

if income tax is reduced

increase in tax free allowance

Question 5

increasing tax free allowance or cutting the MPC what happens (sum up)

Answer 5

increase LoRDI
therefore increase MPC
and therefore increase the level of consumption in economy
and AD

Question 6

If the IR is cut what happens to the cost of borrowing and rate return on savings

Answer 6

cost of borrowing falls

rate of return on savings falls

Question 7

When the cost of borrowing falls what does this do and why

Answer 7

increases consumer incentive to go and borrow money as it’s cheaper to do so

Question 8

the cost of borrowing falls this causes consumers to borrow money as it’s cheaper to do so what are they likely to do

Answer 8

spend on expensive/big ticket items like cars and houses