Factors that influence/impact AD

Question 1

What happens when the general level of prices increase?

Answer 1

• Goods become less affordable (when wages arn’t increased as well) leading to a reduction in household consumption (c) and a decrease in AD.
• Higher prices will decease exports (x) as our goods become for expensive, decreasing AD.

Question 2

What are factors that influence AD

Answer 2

-General price levels
-Disposable income
-Interest rates
-Exchange rates
Consumer/business confidence

Question 3

Define disposable income

Answer 3

The total income that households receive for their input into the production process after the deduction of taxes.

Question 4

What is the effect of increasing wage growth?

Answer 4

Increases disposable income- increasing consumption- increase in AD.

Question 5

What is the effect of tax cuts?

Answer 5

Increases disposable income - increasing consumption - increase in AD.

Question 6

Define discrete income

Answer 6

The disposable income that is available for consumption after the payments of non-avoidable items. These items include food, clothing and shelter.

Question 7

What is the AD equation?

Answer 7

AD= C + I + G + (X-M)