Shifts in AD : Interest Rates and other factors
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13 Terms
When saving money an interest rate will tell you…
how much interest you will get from the bank as a return on savings
When borrowing money an interest rate tells you
The percentage of borrowing which you pay back as the cost of borrowing
When interest rates increase (consumers) …
consumers choose to save more
When interest rates decreases…
consumers choose to borrow more and firms will choose to invest more
Downward multiplier effect
when an initial increase in withdrawals leads to a larger decrease in AD
When consumer confidence decreases…
consumers are more likely to save more decreasing consumption
When consumer confidence increases…
conumers are more likely to spend more icnreasing consumption
Animal spirits are high
investors increase investment
Animal spirits are low
investors decrease investment
Wealth increases
Positive wealth effect an consumption will increase
Wealth decreases
Negative wealth effect and consumption decreases
Savings ratio
what % of disposable income consumers will save
Savings ratio formula:
Total savings/ Disposbale income x 100
