Consumer spending and AD

• What is consumption in the context of an economy?

  Consumption is the total spending by households on goods and services.
• Why is consumption important in aggregate demand for countries like the UK and the US?

  Consumption accounts for a significant portion of aggregate demand, around 66% in the UK.
• What is the equation for aggregate demand?

  Aggregate demand is represented by the equation: C + I + G + X - M.
• What factors can influence consumption independent of the price level?

  Factors include real disposable income, interest rates, availability of credit, consumer confidence, asset prices, and household indebtedness.
• What does the marginal propensity to consume refer to?

  The marginal propensity to consume is the willingness of a household to spend any extra income they earn.
• How does the multiplier effect relate to shifts in aggregate demand?

  The multiplier effect amplifies the impact of changes in consumption on aggregate demand.
• What is real disposable income?

  Real disposable income is income adjusted for inflation and left after taxes and national insurance have been paid.
• How can cuts in income taxes affect consumption?

  Cuts in income taxes can increase real disposable income, leading to a higher marginal propensity to consume and increased consumption.
• What happens to consumption when interest rates are cut?

  When interest rates are cut, the cost of borrowing falls, incentivizing consumers to borrow and spend more.
• How do variable rate mortgages relate to interest rate changes?

  Variable rate mortgages mean that monthly repayments can fall when interest rates are cut, increasing disposable income for households.
• What is the impact of low availability of credit on consumption?

  Low availability of credit can reduce the impact of lower interest rates on consumption because banks may be unwilling to lend.
• How does consumer confidence affect consumption?

  High consumer confidence leads to a higher marginal propensity to consume, encouraging more spending.
• What factors can affect consumer confidence?

  Factors include job prospects and the level of unemployment in the economy.
• How do asset prices influence consumer spending?

  Higher asset prices, such as house and share prices, make individuals feel wealthier, leading to increased spending.
• What is the relationship between household indebtedness and consumption?

  Higher household indebtedness leads to increased saving and decreased consumption as families prepare for potential financial difficulties.
• What are the main factors that can affect consumption in an economy?

  • Real disposable income
  • Interest rates
  • Availability of credit
  • Consumer confidence
  • Asset prices
  • Household indebtedness
• What should be included in a chain of analysis linking consumption to aggregate demand?

  • Use of the marginal propensity to consume
  • Mention of the multiplier effect
  • Clear connections between factors affecting consumption and their impact on aggregate demand
• What will the next video focus on?

  The next video will focus on savings and the determinants of saving.