Shifts in AD

Question 1

Define disposable income

Answer 1

income left over after paying taxes

Question 2

Define the multiplier effect

Answer 2

where an initial increase in injections leads to a larger increase in AD

Question 3

What does the multiplier ratio tell us?

Answer 3

how much GDP will increase in total following an initial injection into the economy

Question 4

What are the three ways to calculate the multiplier ratio?

Answer 4

1/MPW
1/(1-MPC)
1/ MPT + MPS + MPM

Question 5

What three areas do interest rates affect?

Answer 5

consumers who are saving
consumers who are borrowing
firms borrowing to invest
high IR = more saving, less borrowing

Question 6

How do lower pension savings impact AD?

Answer 6

pensioners have to save more for future
increased saving, decrease consumption

Question 7

Ricardo Sousa theory

Answer 7

50% of people own homes
- thus 50% feel richer and spend more, 50% feel poorer and save more
Europe wealth effect = 0%

Question 8

Savings ratio calculation

Answer 8

total savings / disposable income x 100
(as a percentage)

Question 9

Define savings ratio

Answer 9

the percentage of disposable income that consumers will save