The Determinants of Aggregate Demand

AD = C + I + G + (X - M)

1) Consumption

• Aggregate consumption is spending by all the households in the economy on consumer goods & services.
• Spending income is consumption, whereas not spending income is saving.

Interest Rates

• Saving: The rate of interest rewards savers for sacrificing current consumption, & the higher the rate of interest, the greater the reward.
• At any particular level of income, the amount saved will increases as the real rate of interest rises & the amount consumed will fall.
• Borrowing: Interest is the amount of money that is charged by banks on borrowing. If a loan is agreed then it has to be repaid with interest.
• This means households may borrow from commercial banks to buy goods & services.
• The purchase of goods & services on credit card & 'Big-Ticket Items' are affected by changing interest rates. An increase in interest rates may reduce such purchases.
• Mortgage Repayments & Consumption: Most house purchases are completed on the basis of the buyer obtaining a mortgage. 
• A mortgage = a loan granted by banks or building societies to enable house buyers to buy a house.
• Like all loans, mortgage-holders have to pay interest on their borrowings. It is an essential expenditure.

Current Discretionary (Spendable) Income & Consumption:

• An increase in discretionary income should lead to an increase in household consumption.

Consumer Confidence

• Consumers will only spend if they feel confident about the future performance of the economy.
• If households are worried about earnings (income) growth or unemployment, they are more likely to save rather than spend.
• Uncertainty can lead to a lack of confidence about the future of the economy.

Wealth

• = The financial assets held by households.
• Includes the purchase of shares & houses.
• The value of assets is based on the price of assets (house prices or share prices) increases the value of wealth.
• An increase in wealth means that households can increase borrowing on the basis of an increased value of the financial asset (some households can re-mortgage their house). This also means that there will be increased consumer confidence. 

Expectations of Future Incomes

Income Dsitribution

• Rich people…