Consumer Spending and Aggregate Demand Flashcards
(14 cards)
What is consumption in the context of Aggregate Demand?`
Consumption is the total spending by households on goods and services in the economy.
What is the Marginal Propensity to Consume (MPC)?
MPC is the proportion of extra income that households are willing to spend rather than save.
How does an increase in real disposable income affect consumption and AD?
Higher disposable income (e.g., due to tax cuts or increased tax-free allowance) raises MPC, leading to higher consumption and a rightward shift of the AD curve.
What is the multiplier effect in relation to AD?
The multiplier effect occurs when an initial increase in spending leads to a larger overall increase in national income and AD due to repeated rounds of spending.
How do interest rates affect consumption?
Lower interest rates reduce the cost of borrowing and decrease returns on savings, encouraging consumers to borrow and spend more, which increases consumption and AD.
How does availability of credit affect consumption?
Easier access to credit makes borrowing simpler, which can boost household spending on big-ticket items like cars and homes, increasing AD.
How do falling interest rates affect mortgage holders?
Lower interest rates reduce monthly repayments for those with variable or tracker-rate mortgages, leaving more disposable income to spend, which raises consumption.
What role does disposable income play in consumer spending?
More disposable income increases household consumption (C) as people have more money available to spend, which shifts AD to the right.
How does the availability of credit affect the impact of interest rates?
If credit is not available, even low interest rates may not boost borrowing and consumption because banks aren’t willing to lend.
What is consumer confidence, and how does it affect consumption?
Higher consumer confidence leads to higher MPC, as people feel secure in their jobs and future income, so they’re more willing to spend.
How do job prospects affect consumption?
Strong job prospects increase consumer confidence and MPC, encouraging more spending and boosting AD.
How does unemployment affect consumer confidence and spending?
Low unemployment makes people feel secure in their jobs, increasing their willingness to spend and contributing to higher consumption.
How do asset prices affect consumption?
Rising asset prices (like homes or shares) increase perceived wealth, which raises MPC and consumption.
What effect does high household indebtedness have on consumer spending?
High debt levels reduce consumption, as households are more likely to save money and pay off debts rather than spend.
