MACRO - LS3 - Aggregate Demand (Part 3)

Question 1

Consumption definition

Answer 1

The spending on consumer goods/services over a period of time

Question 2

Disposable income (Y)

Answer 2

Money consumers have left to spend after taxes have been taken and state benefits added

Question 3

Marginal propensity to consume (MPC)

Answer 3

Proportion of an increase in disposable income that households would devote to consumption
MPC= Change in consumption/change in income
- likely to be positive but less then 1
- poor people’s likely to be higher as they have to spend more of their increase in income

Question 4

Average propensity to consume (APC)

Answer 4

Average amount spent on consumption out of total income
Likely to be less then one due to savings
APC = total consumption/total income

Question 5

Savings

Answer 5

• what’s not spent out of income
• consumption increases, savings decrease

Question 6

Marginal propensity to save

Answer 6

• how much of an increase in income is saved
  MPS = change in savings/change in income

Question 7

Average propensity to save (APS)

Answer 7

The average amount saved out of total income
APS = Total savings/total income

Question 8

Durable goods

Answer 8

Bought at point in time but continue to provide a stream of services over a period of time
A car might last for 6 years or a television could last for 10 for example

Question 9

Non-durable goods

Answer 9

• Non durable goods are goods that are used up immediately or over a short period of time such as an ice cream or washing up liquid

Question 10

Determinants of consumption

Answer 10

• changes in consumer confidence - if consumers expect incomes to increase/optimistic about economy’s future they will spend more - shift to right. Low consumer confidence indicates expecting incomes to fall/worse economic conditions due to unemployment/wage cuts
• changes in wealth - increase in consumer wealth causes curve to shift to right
• changes in taxes - causes decrease in disposable income causing curve to shift to left
• changes in interest rates - some consumption is financed by borrowing, increase in rates causes borrowing to be more expensive - shift to left
• changes in household indebtedness - high level debt, more payments so less consumption

Question 11

Indebtedness meaning

Answer 11

How much money people owe from taking out loans in the past

Question 12

Consumer confidence

Answer 12

• measure of how optimistic consumers are about future income and future of the economy
• increase purchases of non-durable and luxury goods
• deteriorates in recession - fear of unemployment/less pay/less likely to borrow from bank
• during economic boom confidence increases, causes spending to increase as well

Question 13

Benefits of rising consumption

Answer 13

• AD rises
• faster short run economic growth
• less space capacity
• falling unemployment
• gives businesses confidence to invest

Question 14

Costs of rising consumption

Answer 14

• inflation pressure
• current account deficit
• unbalanced growth
• more household debt
• could be bad for environment