Extract C (lines 3–4) states: ‘Household consumption accounts for approximately 60% of aggregate demand so has a vital role to play in the economy.’ Explain two factors that could cause a fall in consumption. (June 2020)
Paragraph 1 example
- one factor is if the Bank of England raise interest rates
- interest rates are the cost of borrowing or the reward for saving
- if interest rates are higher
- people are more incentivised to save
- and less incentivised to borrow
- therefore there will be a fall in consumer spending
- if there is a fall in consumer spending, there will be a fall in AD
- because AD = C+I+G+(X-M)
- left shift in AD diagram