Question 21 (Economics)

How many of these are correct?

Small questions about AD :
State whether each factor is likely to increase or decreases the level of aggregate demand for the UK economy (other factors remaining the same).

1 - The government decrease the rate of income tax from 22% to 20% . >> With less tax people will work less as their disposable income will rise and so they will substitute leisure for work.

2 - There is a 20% fall in average UK house prices over a two year period. >>This makes more houses in the reach of those on lower income. Savings will increase as people prepare to buy. Suppliers of kitchen goods will stockpile. Thus increasing investment and increasing AD.

3 - There is a consumption boom in the countries of the Euro Zone. >>This will cause inflation leading to a fall in their exchange rate. Thus the £ will rise making imports cheaper and more attractive. This reduces the AD

4 - The exchange rate between sterling and the Euro appreciates by 15% (i.e. goes up in value) over the course of a year . The lower level of exchange rate will make the price of export cheaper >> Reduce the AD

5 - A new survey finds that business confidence has hit a 5-year low. The lower of expectation of the producer will narrow the amount of small firms, reduce level of capital investment. Unemployment will rise making labour cheaper. This brings down wages and will attract inward investment. >> Higher level of AD

6 - The government announces a £400m plan to build a series of wind farms across the UK . The more increase in Capital Investment, the more increase level in AD

7 - Consumers decide to increase their savings ratio>> More funds available for investment. Interest rates fall. Exchange rate falls. Inward injection, multiplier effect. AD rises.

8 - Bank of England signals rise in interest rates of ½% . The rise in IR will decrease the borrowers to invest >> decrease in Capital Investment >> Decrease in AD level

9 - The government increases government spending by £1 billion but raises the amount it takes in income tax by £1 billion . It's uncertain to consider the change in AD.

10 - Chancellor announces tax exemption scheme on new investments for small to medium sized businesses. Less tax collected so a budget deficit. This will cause demand pull inflation leading to a rise in interest rates. >> Fall in AD