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Understanding Aggregate Consumption Dynamics

The document defines various economic terms related to aggregate demand and consumption, including consumption, disposable income, savings, wealth, marginal propensity to consume (MPC), and average propensity to consume (APC). It also lists factors that would increase or decrease consumption and presents a graph showing the relationship between consumer spending and GDP growth in the UK from 1990 to 2008. Generally consumption and aggregate demand follow the same trends, though their relationship may not always hold if other components of aggregate demand change. It is possible for an economy to experience a larger increase in consumption than wages.

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140 views2 pages

Understanding Aggregate Consumption Dynamics

The document defines various economic terms related to aggregate demand and consumption, including consumption, disposable income, savings, wealth, marginal propensity to consume (MPC), and average propensity to consume (APC). It also lists factors that would increase or decrease consumption and presents a graph showing the relationship between consumer spending and GDP growth in the UK from 1990 to 2008. Generally consumption and aggregate demand follow the same trends, though their relationship may not always hold if other components of aggregate demand change. It is possible for an economy to experience a larger increase in consumption than wages.

Uploaded by

sonic boom
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58.

Aggregate Demand: consumption


1. State the terms defined by the following:
1.1 Total planned household spending on goods and services. consumption
1.2 The disposable income that is not spent by households. Savings
1.3 Income after direct tax has been deducted. Disposable income
1.4 The value of a household’s stock of assets. (household) wealth
1.5 The proportion of a change in income that is spent. MPC
1.6 The proportion of total income that is spent. APC
Choose from: disposable income; marginal propensity to consume (MPC); savings; consumption; average
propensity to consume (APC); (Household) wealth
2. What effect would you expect the following to have on consumption (increase or decrease)?
2.1 House prices fall 28% in 2008. Increase
2.2 An increase in the top rate of income tax from 40% to 50%. decrease
2.3 The Bank of England cuts interest rates to a historic low of 0.5% in March 2009. increase
2.4 The savings ratio increases to nearly 5% at the end of 2008. decrease
2.5 Nationwide’s Consumer Confidence Index climbs in February 2009 for the first time in four months. increase
2.6 The Consumer Price Index, CPI, measure of UK inflation hits a 16 year high of 5.2% in October 2008. decrease
2.7 Commercial bank lending to households falls steeply during credit crunch. Increase
3. Data response
Consumer Spending and GDP growth in the UK
Annual percentage change in household spending and GDP at constant 2000 prices
7 7

6 Consumer spending 6

5 5

4 4
Annual % change

3 3

2 2

Real GDP
1 1

0 0

-1 -1

-2 -2

-3 -3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Consumer spending [ar 4 quarters] Real GDP growth [ar 4 quarters]


Source: Reuters EcoWin

3.1 With reference to the table on real consumption expenditure and real GDP growth, analyse the likely relationship
between aggregate demand and consumption.

- as consumption is largest component of aggregate demand they have a positive


relationship and they follow the same trends shown in the graph

3.2 Explain why the relationship between aggregate demand and consumption may not always hold.
- because sometimes they don’t follow the same pattern due to change in the other components.
______________________________________________________________________________________
3.3 Is it possible for an economy to have a bigger increase in consumption than an increase in wages.
-
______________________________________________________________________________________
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