Aggregate Demand Components - Determinants of AD

Task 1: Complete the following table: Determinant of Consumption: Prevalent Interest Rates Explanation of why it influences AD: ____________

• Higher interest rates generally discourage consumption and encourage saving, reducing aggregate demand. Lower interest rates encourage borrowing and spending, increasing aggregate demand.

• Higher interest rates always increase consumption, leading to higher aggregate demand.

• Interest rates have no effect on consumption or aggregate demand.

• Lower interest rates discourage borrowing and reduce aggregate demand.

Task 1: Complete the following table: Determinant of Consumption: Level of Current Income Explanation of why it influences AD: ____________

• As current income increases, households have more disposable income to spend, leading to higher consumption and thus increasing aggregate demand.

• As current income increases, households tend to save all their income, reducing aggregate demand.

• As current income increases, government spending automatically decreases, lowering aggregate demand.

• As current income increases, imports decrease, which reduces aggregate demand.

Fill in the blank: ________ is explained by the life cycle theory of consumption posed by Friedman in contrast to Keynes. He asserts that consumption is based upon the expected lifetime earnings rather than current earnings.

• Expected Future Income

• Disposable Income

• Marginal Propensity to Consume

• Permanent Income

Fill in the blank: It’s not just the flow of income that determines consumption but the stock of ________ too. The wealth effect is where consumption increases if the value of assets increase.

• Wealth

• Debt

• Labor

• Imports

Fill in the blank: In addition to the setting of interest rates, the regulation of lending and borrowing can affect consumption. This is known as the availability of ________.

• Credit

• Currency

• Deposits

• Assets

Expectations of Future Inflation: Price stability generally leads to less cautionary saving, while price instability increases cautionary saving.

• Price stability leads to less cautionary saving, while price instability increases it.

• Price stability increases cautionary saving, while price instability reduces it.

• Both price stability and instability have no effect on cautionary saving.

• Price instability leads to less cautionary saving, while price stability increases it.

Fill in the blank: The formula for Household Savings Ratio is ________ / household disposable income.

• realised or actual household saving

• household expenditure

• gross domestic product

• personal income tax

According to the information provided, if the economy is in a downturn or recession, what is likely to happen to the savings ratio?

• It will fall

• It will stay the same

• It will increase

• It will become unpredictable

When savings increase, what happens to the Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS)?

• MPC increases, MPS decreases

• MPC decreases, MPS increases

• Both MPC and MPS increase

• Both MPC and MPS decrease

When savings decrease, what happens to the Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS)?

• MPC increases, MPS decreases

• MPC decreases, MPS increases

• Both MPC and MPS increase

• Both MPC and MPS decrease