Consumer spending & Aggregate Demand

Question 1

How much does consumer spending account for AD in the UK?

Answer 1

Approximately 60%.

Question 2

What is the marginal propensity to consume (MPC)?

Answer 2

The willingness of a household to spend extra income.

Question 3

What is the multiplier effect?

Answer 3

The additional shifts in aggregate demand leading to increase in economic activity. E.g expansionary fiscal policy increases income and therefore increases consumer spending.

Question 4

What are the main 5 determinants of consumer spending?

Answer 4

Level of real disposable income, Interest rates/availability of credit, Consumer confidence, Asset prices, Household indebtedness.

Question 5

Why is the level of real disposable income a factor of consumer spending?

Answer 5

Disposable income is affected by income tax; if income tax decreases, disposable income increases, leading to a higher MPC.

Question 6

Why is interest rates/availability of credit a factor of consumer spending?

Answer 6

If interest rates fall, the cost of borrowing drops, increasing the incentive for consumers to borrow and spend money, reducing the incentive to save. Low availability of credit decreases MPC.

Question 7

Why is consumer confidence a factor of consumer spending?

Answer 7

If consumer confidence is high due to more job prospects/less unemployment, MPC increases.

Question 8

Why is asset prices a factor of consumer spending?

Answer 8

Linked to wealth; the wealthier an individual feels, the more likely they are to spend, increasing MPC.

Question 9

Give 3 examples of asset prices

Answer 9

House prices, bonds, shares.

Question 10

Why is household indebtedness a factor of consumer spending?

Answer 10

The more in debt a consumer is, the less likely they are to spend (vice versa).

Question 11

Give 3 examples of household indebtedness

Answer 11

Credit card bills, direct debits, mortgages, student loans.