Macro Book 2 Flashcards
(19 cards)
3 main areas of consumer spending
- consumer durables e.g furniture
- consumer non-durables e.g fruit
- services
influences on consumer spending (7)
- real incomes
- unemployment
- consumer confidence
- wealth and the ‘wealth effect’
- taxation
- interest rates
- population
bank of england lends to commercial banks at b… rate of ?%
base rate of 4.25% (May 2025)
how interest rates effect consumers (4)
- return on savings
- variable mortagage rates rise
- loans
- credit
consumer confidence
how willing consumers are to spend their income and take on debt
factors influencing consumer confidence (neoclassical view)
consumers act as rational utility maximisers and make a cost benefit analysis of spending now or later –> factors such as employment rate and wages determine macro consumption
factors influencing consumer confidence (Keynesian)
consumers are reactionary and base decsions on social cues or personal experience –> actions determined by animal spirits (innate drive to action rather than inaction)
MPC
marginal propensity to consume - the proportion of an increase in income that is spent
multiplier effect
when an increase in a component of AD leads to a more than proportional increase in RNO.
multiplier effect example
total wages recived by workers increases by £10mn –> if MPC is 0.9, £9mn is spent £1mn is saved –> £9mn in spending paid back to households in form of factor incomes –> household income increases by £9mn so £8.1mn spent £900k saved –> process repeats
shows from an inital increase in incomes of £10mn, consumption increases by more than £17mn
size of consumption multiplier =
1 ÷ MPS
investment
firms’ spending on new capital and spending to fix old capital
determinants of investment (9)
- price of capital
- price of labour
- consumer confidence
- technological change
- taxation
- interest rates
- business confidence
- business cycle
- market growth
accelerator effect
initial increase in AD –> (some) firms need more capital to produce more output –> firms invest more –> AD increases again
short run economic growth
increase in real expenditure (AD)
long run economic growth
increase in productive capacity ( ^QQT of factors of production)
factors shifting LRAS curve (7)
- education + training
- increased productivity
- discovery of natural resources
- war + natural disasters
- new technology
- increase in size of labour force
- investment in capital
factors shifting SRAS
factors effecting firms’ costs of production. a significant change in any of these factors is called a supply-side shock
recession
a fall in real GDP for 2 consecutive quarters
