Macro - Aggregate Demand Flashcards
How is personal wealth a determinant of consumer expenditure?
Rises in asset prices (especially house and share prices) leads households to feel wealthier and thus consumer a greater proportion of their current income.
How is income a determinant of consumer expenditure?
Disposable income (after taxes and welfare payments) determines now much a consumer will spend. Alongside their marginal propensity to consume, a higher income results in increased consumption.
How are interest rates a determinant of consumer expenditure?
For savers: a change in interest rates alter the relative attractiveness of spending and saving.
For borrowers: it alters the cost of borrowing to finance consumption.
Falls in interest rates are associated with a rise in house prices –> producing a “wealth effect”.
How is credit availability a determinant of consumer expenditure?
Greater access to channels of credit alter consumption levels.
Increased access -> increased consumption (depending on debt/income ratio)
How is inflation a determinant of consumer expenditure?
Inflation discourages consumption as households save more to maintain the real value of their savings.
How are consumer expectations a determinant of consumer expenditure?
Assumption made here that present consumption is determined more by long term view of income prospects rather than short term view (current income)
Periods of economic growth may raise expectations -> C increases
Periods of recession may cause uncertainty and reduce expectations -> C decreases
How is the age distribution of the population a determinant of consumer expenditure?
Post-45 age group are net savers.
Younger groups are net borrowers with a higher propensity to consume.
How are channels for savings a determinant of consumer expenditure?
Consumption and savings share the same determinants.
If consumers are given incentives to save such as ISA schemes then consumption may fall.
However such channels may simply alter the saving patterns of households rather than the total volume.
How is consumer debt a determinant of consumer expenditure?
Debt levels influence the willingness to borrow further.
How is unemployment a determinant of consumer expenditure?
Reduces real incomes.
Influences expectations of future job security.
What are the 5 determinants of investment expenditure?
- Business expectations
- Cost of investment (interest rate) - the cost of borrowing to finance the investment or the opportunity cost of using internal funds.
- Actual profit levels - may be more important the the opportunity cost of using profits to fund investment
- Changes in technology
- Impact of government policy (tax, interest rates and exchange rates)
How can government taxation policy affect investment expenditure?
Corporation tax affects profit levels.
Similarly investment may be encouraged through the use of subsidies or tax breaks.
How can interest rate policy affect investment expenditure
Affects the cost of investment and impacts exchange rate.
How does exchange rate policy affect investment expenditure?
Low exchange rates improve export competitiveness (expected sales) but worsens domestic inflation (operating costs).
High exchange rates decrease export competitiveness and reduce inflation rates.
What are the 3 determinants of government expenditure?
- The business cycle - recession will increase social security spending. Recoveries will reverse this.
- Political cloud - government decides the amount that will be spent or not spent and the levels of taxation which alters consumption and
investment. - Economic growth - allows govt to increase taxation. However govts still have the option of borrowing additional funds so changes in tax receipts may not affect govt spending.
