Unit 3 - Consumption

What affects household spending

Consumer wealth

• more wealth = more spending (AD shifts ->)
• less wealth = less spending (AD shifts <-)

Consumer expectations

• Positive expectations = more spending (AD shifts ->)
• Negative expectations = less spending (AD shifts <-)

Household Indebtedness

• Less debt= more spending (AD shifts ->)
• more debt= less spending (AD shifts <-)

Taxes

• less taxed = more spending (AD shifts ->)
• more taxes= less spending (AD shifts <-)

Gross Private Investment spending is sensitive to

The Real Interest Rate

• Lower Real Interest Rate =more investment (AD shifts ->)
• Higher Real Interest Rate = less investment (AD shifts <-)

Expected Returns

• High Expected returns =more investment (AD shifts ->)
• Lower expected returns = less investment (AD shifts <-)
• 
  

  Expected returns are influenced by

• Expectations of future profitability
•  Technology
• Degree of excess capacity (existing stock of capital)

Government Spending

• More spending (AD shifts ->)
• Less spending (AD shifts <-)

Net Exports

• Net exports are sensitive to:
• - exchange rates (international value of a $)
• strong $ = more imports and fewer exports (AD shifts <-)
• Weak $= fewer imports and more exports=(AD shifts ->)

Relative income

• Strong foreign economies= more exports =(AD shifts ->)
• Weak foreign economies = less exports= (AD shifts <-)