The Components of Aggregate Demand

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  • Created by: Cara Li
  • Created on: 26-03-15 12:02

Consumer expenditure 

Real disposable income. Richer households and richer economies tend to spend more in total than poorer ones. The APC may fall as disposable income rises. 

Wealth. The more wealth people have, the more they tend to spend. It results in greater consumer confidence.

- Consumer confidence and expectations. When consumers are optimistic about the future, they spend more. This is why sometimes the proportion of income spent can rise as income rises.

- The rate of interest. A fall in interest rate will lead to a rise in consumer expenditure. 1) It makes it cheaper for consumers to borrow in order to buy expensive items. 2) It reduces the incentive to save because consumers receive less interest. 3) Those who are paying interest on a mortagage or on any other type of loan will have more money to spend. However, spending may not rise when the interest rate falls. 1) People may think that the reduction is only temporary. 2) People are worried about the future.

- The age structure of the population. It is generally thought that the young and the elderly spend a relatively high proportion of their disposable income.

- Distribution of income. The government measures that redistribute income from the rich to the poor are likely to increase total consumer spending.

- Inflation. If people expect prices to rise rapidly in the future they may increase their spending now. One the other hand, there have been periods when inflation was high and accelerationg when people increased their saving rather than their spending. This may have been because people trying to maintain the real value of their saving.

Investment

- Changes in real disposable income. A rise in disposable income leads to a long-lasting increase in demand for consumer goods and services, which may encourage firms to expand their capacity. 

- Expectations. Firms are much likely to invest if they…

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