Aggregate Demand

• What is consumption in the economy?

  Total spending by households on goods and services
• Why is consumption important in the UK and US economies?

  It significantly contributes to aggregate demand
• What percentage of aggregate demand does consumption account for in the UK?

  Around 66 percent
• What is the equation for aggregate demand?

  Aggregate demand = C + I + G + X - M
• What factors can shift aggregate demand independent of the price level?

  • Level of real disposable income
  • Interest rates
  • Availability of credit
  • Consumer confidence
  • Asset prices
  • Household indebtedness
• What does real disposable income mean?

  Income adjusted for inflation after taxes
• How can income taxes affect disposable income?

  Tax cuts increase real disposable income
• What happens to consumption if interest rates are cut?

  Incentive to borrow and spend increases
• How do lower interest rates affect saving behavior?

  They reduce the incentive to save
• What is the impact of lower interest rates on mortgage repayments?

  Monthly repayments may decrease for households
• How does the availability of credit affect consumption?

  Low credit availability reduces borrowing impact
• What influences consumer confidence?

  Job prospects and unemployment levels
• How does high consumer confidence affect spending?

  It increases the marginal propensity to consume
• What is the relationship between asset prices and consumer spending?

  Higher asset prices increase consumer spending
• What types of asset prices are linked to wealth?

  House prices, share prices, and bond prices
• How does household indebtedness affect consumption?

  Higher indebtedness leads to increased saving
• What are the main factors affecting consumption in the economy?

  • Real disposable income
  • Interest rates
  • Availability of credit
  • Consumer confidence
  • Asset prices
  • Household indebtedness
• What should you include in your analysis of consumption changes?

  Marginal propensity to consume and multiplier effect