Question

Explain in short answers please:

1.Graphically illustrate and explain what happens to consumer spending when consumers become more optimistic about the future, i.e., consumer expectations rise.

2.Graphically illustrate and explain how an increase in the interest rate would affect consumer spending.

3.Graphically illustrate and explain what happens to consumer spending in response to an increase in consumer income.

Answer 1

!. if the consumer feels optimistic about future economy they will tend to consume more.Thus the AD curve will shift right wards and there will be more output in the economy along with increasing price level thus consumer spending will increase as they will consumer more and investment more with a hope of getting more positive return in the coming future from that investment .

mic when consumer itsi rispositive about SALOlcat future economy ADZ - A quantity

2.If interest rate increases it will be more profitable for a consumer to save than spending , along with this increasing interest rate will increase the cost borrowing and increases the value of the currency, confidence level of the consumer starts to fall thus consumer lowers his/her spending and there will be a left ward of AD curve. Exact opposite things happen when interest rate decreases thus consumer start increasing their spending.

ASO ADO ADI decrease in int. Rate INI ADO Y AD 2 IADI Increase A ADO = in int.. o rate a 999, Q. ADO TADO

3. If income increases, the consumer will face a higher budget line thus utility maximizing bundle will increase, if the good is normal good, with increasing income consumer will increase spending on them but if the good in inferior good then with increasing income consumer will lower his spending on inferior good.

Infernion Uo Normal Good No No