AS Macro economics help! Watch

Eddy!
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I'm not too sure on these two aspects with Macro...
(A) When incomes rise, do savings then go up and thus reduce aggregate demand in the economy?
(B) If the price of a good falls, will demand for that good increase or stay the same? (or is that more micro related?)

Thanks
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tehforum
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(Original post by Eddy!)
I'm not too sure on these two aspects with Macro...
(A) When incomes rise, do savings then go up and thus reduce aggregate demand in the economy?
(B) If the price of a good falls, will demand for that good increase or stay the same? (or is that more micro related?)

Thanks
1) I think when incomes rise, there is a wealth effect, so people spend more, increasing AD.

2) Simple S&D analysis. When a price of a good changes, the demand shifts along the curve.
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Harry.K
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a) When people's income rise, they have more money to spend on consumption- which increases AD, as the formula to calculate AD is consumption + government spending + investment + (exports minus imports).

b) That is much more micro related but you are correct.
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hockeyjoe
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(Original post by Eddy!)
I'm not too sure on these two aspects with Macro...
(A) When incomes rise, do savings then go up and thus reduce aggregate demand in the economy?
(B) If the price of a good falls, will demand for that good increase or stay the same? (or is that more micro related?)

Thanks
If incomes rise, then saving will rise but it wont be proportional to the rise in income, the saving will increase but not by as much as income has, what also happens is that consumption increases (the consumption will increase by a greater proportion than saving will) which will counter balance the increase in saving and shift AD right, however, you could argue that imports would increase...which would obviously shift AD left..there are various things that can happen.

that is micro related its not really relevant to macro, but to answer your question it depends on what type of good it is, and how elastic demand is.
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kingshan16
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AD = C + I + G + (X-M)

When real disposable income rises AD will increase as people will have a higher percentage of income to spend.

Saving would go up when lets say there is high rate of interest or when cosumber confidence is low. Maybe there would be a case to say that when real disposable income does go up target saver would look to save more.

If price of a product does fall usually demand does increase.
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Tateco
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Ceteris paribus, when incomes rise, consumption rises. However you can look at things like the permanent income hypothesis which discusses the fact that the perceived permanence of income changes can have an affect on how much consumption increases by.

Savings don't automatically go up either, savings is determined by disposable income but it also have lots of other factors affecting the savings ratio which are arguably more important. For example interest rates, consumer confidence, mortgages, pension schemes, saving for big ticket items and future generations.
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tehforum
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(Original post by tateco)
Ceteris paribus, when incomes rise, consumption rises. However you can look at things like the permanent income hypothesis which discusses the fact that the perceived permanence of income changes can have an affect on how much consumption increases by.

Savings don't automatically go up either, savings is determined by disposable income but it also have lots of other factors affecting the savings ratio which are arguably more important. For example interest rates, consumer confidence, mortgages, pension schemes, saving for big ticket items and future generations.
Hey, do you have any AS level micro economics 25 marker questions handy?
You seem pro, and you know what it's pretty hard for micro.
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Tateco
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(Original post by tehforum)
Hey, do you have any AS level micro economics 25 marker questions handy?
You seem pro, and you know what it's pretty hard for micro.
I haven't got any micro ones written up on here no, sorry mate. I haven't done micro in about 6 months so I might be a bit rusty, if you PM me with a couple of questions on topics you find specifically hard I'll try my best to help
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SpriteOrSevenUp
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(A) When incomes rise, do savings then go up and thus reduce aggregate demand in the economy?

With this, in Economics we generally assume that if incomes rise, then our disposable income rises, and because of this, we spend more. This will shift the AD curve to the right, as consumption is a component of AD, as AD = C + G + I + (X-M).

However, in reality this doesn't always happen, because as you said, some people may choose to save more - your point is valid as an evaluative one in a 25 marker. If people save more, then consumption will fall, shifting the AD curve to the left.

(B) If the price of a good falls, will demand for that good increase or stay the same? (or is that more micro related?)

This is more micro-based, but with a supply and demand diagram (micro S/D one not macro AD/AS) you could show that a fall in prices leads to a rise in demand for that good.
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hannahhh13
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(Original post by Eddy!)
I'm not too sure on these two aspects with Macro...
(A) When incomes rise, do savings then go up and thus reduce aggregate demand in the economy?
(B) If the price of a good falls, will demand for that good increase or stay the same? (or is that more micro related?)

Thanks
If this was in an essay question, I would say that if incomes rise, aggregate demand would probably rise but that it depends on the marginal propensity to consume/save.
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