Reasons for shift in AD by Matt Smith

Hamza S

2015-01-28 12:53:22 UTC

A rise in interest rates will lead to a reduction in consumer spending because people will choose to save more. Higher interest rates also lead to a reduction in investment because borrowing money to invest becomes more expensive also higher interest rates means there's a greater opportunity cost of investing existing funds instead of putting them into a bank account with a high interest rate. Both will lead to a reduction in AD and a shift to the left of the AD curve.

However interest rates are unlikely to increase as they have been at 0.5% for over 5 years and increasing it will increase savings leading to a reduction in consumption reducing AD.

Aamirah

2015-01-28 12:56:57 UTC

If there is an increase in the rate of interest, it will have affect on consumption as it will be more expensive to borrow money, especially if they are low income households, which results in one having less disposable income to spend on goods and services, showing a decrease in consumption. If consumption is low, it will shift the AD curve to the left, as consumption is 60% of aggregate demand. This is why high interest rates creates the incentive to save, as the opportunity cost of not saving will will be high.

However, it is unlikely that interest rates will fall in the UK, as it is already 0.5%, the lowest for many years.

Balraj

2015-01-28 12:58:07 UTC

If interest rates falls beyond 0.5% in the UK, it will make it cheaper for firms to borrow money from the banks. This could lead to an increase in investment by companies on more capital, buildings and land for expanding. As a result of the multiplier effect, where an initial injection into the economy will lead to an overall rise national income, therefore causing a shift in the AD curve from AD1 to AD2

Bhavisha

2015-01-28 12:59:07 UTC

If corporation tax (a tax on firms) decreases, firms will face lower costs. This means that they are more likely to invest as they can afford to do so. As investment is a component of AD, increased investment leads to a shift in the AD curve to the right. The AD curve thus moves from AD1 to AD2. Moreover, increased investment can lead to the multiplier effect- this initial injection in the economy could lead to larger increases in national income than initially expected. For example, if a company invests in a new factory, perhaps more construction workers will become employed, who can then spend in the economy, potentially leading to economic growth. Despite this, the extent to which AD will change (following changes in corporation tax or investment) depends on other factors. Often, despite high corporation tax, firms will continue to invest in new technology stay competitive and maintain profit. However, this may be dependant on technological progress within a country. Firms in LEDCs may find it difficult to access the latest machinery (as technological progress may be slow in their home country) and may not be able to afford importing it from MEDCs. Also, we must consider that if investing will lead to significantly lower costs in the future, firms may continue to invest (regardless of corporation tax) to save more money in the long term. Additionally, the extent to which AD changes depends on the type of investment; some forms of investment may increase AD more than other forms (a small firm investing in one machine is less likely to have a huge impact on AD compared to a large firm building a new factory).Therefore, these are all factors to consider when AD increases from investment.

Sukhi

2015-01-28 12:59:58 UTC

If businesses increase in business confidence and have higher expectations for the future business will feel more confident when making an investment. The reason to why business may be prepared to invest more is due to high confidence levels they are more comfortable taking risks. This would shift the AD curve towards the right as AD is increasing. However during times of recession when people have low incomes business may reduce investments to prevent loss which may ultimately lead to the AD curve shifting left as AD is decreasing . If however the AD does increase it would have a multiplier effect as more jobs will be created decreasing unemployment and levels of national income will also rise...

Farah

2015-01-28 13:00:20 UTC

If you expect a better economy in the future you would be more confident to spend more as you would expect an increase in your disposable income and therefore consumption will increase which will result in an increase in the AD curve from AD1 to AD2. However households may spend their money on products outside our economy and therefore this would increase imports and as a result decrease the AD curve from AD1 to AD3.

L cramp

2015-01-28 13:00:44 UTC

There may be an increase in wealth due to increase in share prices,this leads to an increase in consumption as consumers feel more confident and this leads to aggregate demand therefore increases from AD1 to AD2

Ridwan

2015-01-28 14:31:51 UTC

Change in wealth:

For many people their house is the most valuable they have. If there is a fall in price for the housing market, there will be a decrease in household financial wealth i.e. people are less wealthy. This could have a negative effect on consumers' confidence. Therefore they are likely to save more and consume less. This a fall in consumption, which leads to a decrease in AD, so the AD curve shifts to the left.

However, currently housing prices are rising in the UK, especially around London.

Lucy Collier

2015-01-28 15:25:48 UTC

A change in consumption:

If the rate of interest was to increase from the current rate of 0.5%, it might result in more people saving as they get more reward. It will also be more expensive to borrow, and people will spend a higher proportion of their income on paying their mortgage. Consequently, a decrease in consumption will occur, particularly regarding the consumption of durable goods as they are more of an investment. Therefore, a decrease in consumption results in a decrease in AD - shifting the AD curve to the left. However, there are other factors which influence how much people save, such as inflation - low inflation (such as the current rate of 0.5%) could decrease the amount people save as prices are low and therefore more affordable.

Sadiq

2015-01-28 21:46:59 UTC

A decrease in income taxation will lead to an increase in consumer confidence as a result, consumers will feel more optimistic which is the wealth effect. This will the increase consumption on good/services so there is less incentive to saving, This will lead to the economy to contract, which will shift the AD curve from AD1 to AD2. This will be positive for the economy as consumers have more discretionary income therefore there is a rise in the real national income resulting in the multiplier effect which will stimulate more spending on goods/services. The new equlibrium is at P2Y2.

Jude

2015-01-28 22:34:44 UTC

If the rate of interest in the UK rises, it will create an added incentive for consumers, predominately those with a low income, to start saving more of their income. Savings is a leakage into the economy and it affects the amount of money an individual or business is willing to spend. A decrease in spending will therefore lead to a fall in consumption, especially the consumption of durable goods such as phones and cars. This fall in consumption will result in a fall in aggregate demand, thus shifting the the AD Curve to the left.

Adam Girach

2015-01-28 22:39:23 UTC

If there was an increase in interest rates, it would lead to an increase in the cost of borrowing. this would then lead to people having the incentive to save as they would get more reward. Furthermore, an increase in interest rates would result in a decrease in consumption as it would be more expensive for people to borrow. This would then cause a decrease in aggregate demand which would result in the AD curve shifting to the left.

Adam Master

2015-01-29 00:00:13 UTC

One of the components that affects consumption is income. If income levels rise then consumers will have more disposable income to spend on goods and services therefore there would be an increase in consumption and AD. But some of this disposable income will be spent on imported goods which is a leakage and would thus decrease in AD , however the in the UK economy consumption is worth 60 percent of AD. This suggests that the level of AD will still increase but not as as it could have .

Zaheda Shaikh

2015-01-29 07:37:25 UTC

Exports

- Exchange Rates

A fall in the value of the pound means imports are more expensive and exports are cheaper. this means the UK will export more than they import. This will lead to an increase in aggregate demand. Similarly, if the value of the pound rises, the UK will import more as they become cheaper for the UK, but exports will decrease as the UK is now less competitive, countries around the world can find similar products/services which are cheaper from other countries. This will lead to a decrease in aggregate demand as there are less injections and more leakages. In periods of economic growth, firms have more money to invest, this could increase the productivity of the economy, and in the long run, increase exports. In the current economy, the UK is predicted to grow by only 2.4% in 2015. This could mean that the UK may not be able to increase productivity, as firms are reluctant and unsure about the future. However, economic growth could also harm exports as high economic growth could lead to inflation making UK exports less competitive.

Demand for UK exports, will depend on the rate of economic growth in other countries. The UK’s main export targets are EU countries. Therefore, if there was growth in the Eurozone, the UK will expect an increase in demand for their exports. A recession would cause a fall in demand for UK exports.

Josh J

2015-01-29 07:45:45 UTC

Investment: Corporation Tax Rates

If the CTR were to fall, then firms' profits would increase. These profits could then be spent on investment, which would then in turn cause an outward shift in AD.

An increase in AD would cause a domino effect, leading to the 'Multiplier.' This is where the increase in consumption is greater than the initial injection into the circular flow of income.

However, not all these excess profits are likely to be spent on investment but instead may be given to shareholders in the form of dividends as a a reward for their commitment to the firm.

This reduction in CTR is unlikely especially in the UK's current economic situation. With a Budget Deficit of £84bn for 2015, the government is unlikely to reduce tax as this would further increase the BD, which would further deteriorate the economic situation for the UK.

Shehzad

2015-01-29 08:11:16 UTC

Rate of interest:

If an increase in the rate of interest were to occur, more individuals would take advantage of the opportunity to save and therefore spend less. Also, an increase in interest rates will make borrowing money more expensive, and as a result this would lead to a decrease in consumption and by effect a decrease in AD. This would a shift from AD1 to AD3 on the AD curve. However, the interest rate is currently at 0.5%, the lowest in 400 years. This strongly suggests that interest rates are not likely to drop any time in the foreseeable future.

Nick

2015-01-29 08:44:13 UTC

Wealth.

Decreased wealth of the consumer, may lead to lack of consumer confidence, and therefore a decrease in consumer spending. Consumers feel less wealthy when their assets decrease in price, this however could lead to an increase in consumption due to products like cars and houses decreasing in price.

A decrease in price may lead to a increase in demand. People will want to buy the house when prices are low. This means we do not know how much the AD curve will shift.

For example if consumers feel less wealthy this may happen.

http://www.bbc.co.uk/news/business-31017018

Manraj Singh Dhillon

2015-01-29 11:58:43 UTC

A decrease in income tax will increase the income of consumers which will mean they have more disposable income. This will therefore increase consumption and AD. This will result in the AD curve shifting to the right showing a increase in Aggregate demand. However in the current economic climate with the government having a budget deficit of 84 billion it will be highly unlikely for the government to cut taxes, if anything the government will be looking to increase income tax, which will result in households having less disposable income and a decrease in consumption, particularly for durable goods. BOP BOP.

Think of me..

2015-01-29 13:43:12 UTC