consumption + AD

Question 1

aggregate demand

Answer 1

total demand in an economy, the total of all expenditure in a country at a given price

Question 2

how to calculate GDP/ factors effecting AD

Answer 2

C+I+G+(X-M)
consumption
+investment
+govs spending
+(exports-imports)

Question 3

what is national expenditure measured in

Answer 3

GDP

Question 4

how much of consumption accounts for AD

Answer 4

60-65%

Question 5

what is consumption

Answer 5

the spending on consumer goods and services over a period of time

Question 6

what effects the rate of consumption

Answer 6

• change in the prices of houses
• change in the value of stocks and shares

Question 7

what is wealth effect

Answer 7

wealth of households increase then the rate of consumption increases; spending more and stimulating the broader economy

consumers feel more financially secure due to the rise in their asset values, such as corporate stock prices or home values.

Question 8

how can an expectations of increase in inflation increase consumption

Answer 8

eg house prices are expected to rise, people will be tempted to bring forward their purchases

increase consumption and reduce saving

Question 9

how can an expectations of increase in inflation decrease consumption

Answer 9

rising inflation erodes the real value of money wealth

households react by attempting to restore the real money of their wealth and save more by decreasing consumption

Question 10

how can an expectations of increase in interest rates decrease consumption

Answer 10

reward for saving is greater

increase in interest rates lead to
- increase mortgage payments cutting in spending
- reduces the value of stocks on stock market reducing household wealth leading to the fall in consumption

Question 11

how can an expectations of an increase in the availability of credit increase consumption

Answer 11

it determines the price of credit, as credit is more wildly available it will increase consumption

Question 12

how can expectations and consumer confidence effect consumption

Answer 12

high confidence
-with more income available households often choose to build up their stocks of savings in preparation for retirement

Low Confidence
-consumers are pessimistic or uncertain about the future, they tend to save more and spend less, potentially leading to a decrease in demand and economic slowdown

Question 13

what is consumption function

Answer 13

the relationship between income and consumption

Question 14

what is Marginal Propensity to Consume MPC

Answer 14

the proportion of a change in income that is spent on the consumption of goods and services; as opposed to being saved

Question 15

MPC calculation

Answer 15

change in consumption/
change in income

Question 16

If a household receives an additional $100 in income and spends $80 of it, what is the MPC?

Answer 16

The MPC is 0.8.

Question 17

True or False: An MPC of 1.0 means that all additional income is saved.

Answer 17

False.

Question 18

Fill in the blank: If a person has an MPC of 0.6, they will save _____ of their additional income.

Answer 18

0.4.

Question 19

In a scenario where income increases from $2,000 to $2,500 and consumption increases from $1,600 to $2,000, what is the MPC?

Answer 19

The MPC is 0.8.

Question 20

what effects gov spending

Answer 20

an increase in gov spending with no change in taxation will lead to a fall in budget surplus increasing aggregate demand

Question 21

what are consumption influences

Answer 21

• wealth effects
• the availability of credit
• inflation
• consumer confidence
• composition of households

Question 22

what increases investment

Answer 22

• business confidence
• fall in interest rate
• increase in company profitability

Question 23

consumption function

Answer 23

difference between income and expenditure

Question 24

MPS

Answer 24

marginal propensity to save, is the proportion of an increase in income that is saved rather than spent

Question 25

how is MPS calculated

Answer 25

change in saving/ change in income

Question 26

APS

Answer 26

Average Propensity to Save is the proportion of total income that is saved, typically expressed as a percentage of disposable income

Question 27

APS calculation

Answer 27

dividing saving by income

Question 28

What is the formula for calculating the marginal propensity to save (MPS)?

Answer 28

MPS = Change in Savings / Change in Income

Question 29

True or False: The average propensity to save (APS) is calculated as total savings divided by total income.

Answer 29

True

Question 30

If a household's income increases from $50,000 to $60,000 and their savings increase from $5,000 to $10,000, what is the MPS?

Answer 30

0.5

Question 31

Fill in the blank: The average propensity to save is calculated by dividing total savings by total _____.

Answer 31

income

Question 32

What does a higher MPS indicate about a household's saving behavior?

Answer 32

It indicates a greater proportion of additional income is being saved.

Question 33

If a person saves $200 from a $1,000 income, what is their APS?

Answer 33

0.2 or 20%

Question 34

Multiple Choice: Which of the following represents a scenario where MPS is equal to 0? A) Savings increase as income increases B) Savings remain constant as income increases C) Savings decrease as income increases

Answer 34

B) Savings remain constant as income increases

Question 35

What is the relationship between MPS and the marginal propensity to consume (MPC)?

Answer 35

MPS + MPC = 1

Question 36

If a household has total income of $80,000 and total savings of $16,000, what is their APS?

Answer 36

0.2 or 20%

Question 37

True or False: An MPS of 0.75 means that 75% of any additional income is saved.

Answer 37

True

Question 38

what is investment

Answer 38

addition to capitol stock of the economy

Question 39

gross investment

Answer 39

measures investment before depreciation

Question 40

net investment

Answer 40

takes depreciation into account

Question 41

higher interest causes.. and why

Answer 41

means less investment because of - increased cost of borrowing - firms might have to postpone or cancel investment projects - reduced projected profitability - worsening in BOP can lead to a lower AD

Question 42

lower interest rates leads to and why

Answer 42

higher investment because - reduced cost of borrowing, firms are able to undertake investment in capital goods such as machinery - increased expected profitability - improved business confidence

Question 43

what is a key tool in expansionary monetary policy

Answer 43

- lower interest rates aimed at boosting investment and overall economic activity

Question 44

what has a lower reward for saving

Answer 44

lower interest rates as consumption will be higher

Question 45

what 9 things effect investment

Answer 45

- actual + expected demand for goods and services - cost of capital stock - availability of credit - business taxes/ retained profits - business confidence (animal spirits) - availability of suitable investment projects - tech- pace of change - risk - gov intervention subsidies

Question 46

accelerator theory

Answer 46

a rise in demand leads to a proportionally larger increase in investment spending than the capacity

Question 47

accelerator theory real life explanation

Answer 47

when an industry's demand is rising quickly firms may respond initially by using their existing productive capacity more intensively or running down stocks of finished products if high demand is expected they may increase spending on plant and machinery, factories, new tech to increase supply capacity

Question 48

in accelerator theory changes in investment can be

Answer 48

directly linked to changes in the rate of GDP growth

Question 49

gov. budget surplus

Answer 49

gov gains more in taxes than it uses on services (fiscal policy)

Question 50

gov. budget deficit

Answer 50

gov has a negative balance as it spends more than it receives

Question 51

what can gov spending be used to boost

Answer 51

spending by the multiplier effect

Question 52

multiplier effect

Answer 52

when the initial injection into the circular flow causes a bigger final increase in GDP

Question 53

eg of multiplier effect

Answer 53

if a business decides to invest and build a new factory - company hired t build - companies take on more workers -workers spend more money - other companies may need to take on more workers due to demand - gov is getting in more revenue from taxes whilst paying out less in benefits which is more to invest

Question 54

what is GDP

Answer 54

the value of goods and services produced by a country during a certain period

Question 55

multiplier effect calculation

Answer 55

1/ 1- MPC

Question 56

gov. investment

Answer 56

the spending by the government on capital goods, which are used to produce other goods and services in the future