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•
If on fixed rate mortgage: no affect on consumption
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Depends on other factors such as income
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Depends on magnitude of interest rate
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Depends on consumer confidence
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Time lag between base rate and consumer interest rates
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Government fiscal policy may affect/counteract
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Depends on level of spare capacity (AS inelastic or not)
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Exchange rates may affect AD
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Change in Base rate may not affect consumer rates if banks are financially suffering
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Banks may not be willing to lend, despite QE
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Depends on Marginal propensity to save
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Depends on consumer & firms' confidence
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If consumption rises as a result of low tax, imports may rise, causing opposite effect on AD
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If multiplier is small, infrastructure spending has less impact
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Nor as effective at stimulating AD if LRAS (inelastic AS)
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Time lags of infrastructure spending
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Increased national debt
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Worsened current account (Expansionary F.P)
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Not as effective if real incomes rising (Contractionary F.P)
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Taxes may cause disincentive to work
1.
Asks 11,500 households chosen randomly to record what they spend over 2 weeks
2.
Used to decide a 'basket': 650 goods & services (for which price info is collected in the next survey)
3.
RPI and CPI are weighted to reflect importance of different expenditures in the basket
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International comparisons: CPI used in all EU countries
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Calculation Method: RPI: Arithmetic mean for prices > CPI: Geometric mean for prices
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Housing Costs: CPI excludes items related to housing e.g mortgage interest rates
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Population Covered: CPI covers all households, RPI excludes extreme 4%
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