Aggregate Demand and Consumer Confidence Essay

Submitted By ZZR821
Words: 1844
Pages: 8

Question 1
The consumption schedule indicates the relationship between household consume and the levels of disposable income (DI), this relationship is positive, which means "households will spend a large proportion of small disposable income than of a large one” (Jackson & Mclver 2011 p183). The consumption is directly related to the size of disposable income, therefore the relationship between disposable income and consumption is represented by the consumption schedule. Generally, disposable income of the national income is taken as a measure for the income.

The purpose of the consumption schedule is summarize the household sector and consumption - income, thus as provide blow graph, consumption line is to explain the problem between household and income. Moreover, the consumption line is based on the Keynesian's Economics.

The key measures of consumption schedule that are normally presented in an average propensity to consume (APC) and marginal propensity to consume (MPC). APC is the average consumption given by total income that is consumed and MPC is the changing in consumption with a change in income.

The graph 1 illustrates that the consumption schedule which is C line generalises on the relationship between disposable income and consumption, as well as this relationship is positive. The 45o line shows consumption equal disposable income. We can see clearly from graph 1, when disposable income is 0, but consumption is not zero, because people still spending money on the general living cost.

There are some important factors determinants of household consumption, which is non-income determent that may cause households to consume more or less at each possible level of disposable income. Based on graph 1, we will explain how important factors determinants of household consumption.

Firstly, consumer confidence is key factor impact on spending. According to article, says Australian consumers confidence decreased significantly, also the survey measures that consumers do not have correct track for actual consumption. Consequently a drop in consumer confidence, consumption decrease with the same direction. The graph 2 indicates that when consumer confidence decreases lead to a reduction in the consumption, thus consumption line C shift down to C’ as result in decreasing in income (Y1 move to Y2). Moreover, the survey indicates the disappointing data on gloomy economic growth and employment. On the other hand, if people are positive about current economy, then they have more confidence to boost their spending as well as they feel more reluctant to save.
Moreover, wealth is another reason to affect the household consumption. The household who is hold more money, then they are willing to spend other than saving. For example, a house price rise encourages higher levels of borrowing and leads to increase consumption expenditure. Consequently, it’s clearly show in graph 3, when wealth increase and household is able to hold more money, the C line move upwards to C” as well as an increase in disposable income (Y1 move to Y3). There are two types of wealth, financial wealth (stocks, money, bonds) and physical wealth (cars, furniture, house and appliances) (Jackson & Mclver 2011 p186). An increase in financial assets motivates the household sector to raise consumption but drop down in saving.

A change in interest rates impact consumption expenditure as well. A decrease in interest rate will increase consumption and more investors are willing to invest the projects as a result a lower financing cost, also household are able to borrow money from bank with lower interest rate. The graph 3 also shows the situation which is a lower interest rate results to higher consumption, thus C line shits to C” as well as result in increased the effective disposable income of household. On the contrary, high interest rate tends to restrain household consumption due to opportunity cost.

In addition, a fiscal