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    Hi, in my text book, it talks about effect of a rise in price for each component of expenditure (AD) when price rises. It starts off by talking abut consumption, and then it starts talking about the rate of interest, why????

    (if you have the economics Alain Anderton AQA fifth edition textbook, it is on page 183, right at the bottom of the right hand side. )

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    (Original post by Hi, How are you ?)
    Hi, in my text book, it talks about effect of a rise in price for each component of expenditure (AD) when price rises. It starts off by talking abut consumption, and then it starts talking about the rate of interest, why????

    (if you have the economics Alain Anderton AQA fifth edition textbook, it is on page 183, right at the bottom of the right hand side. )

    Thanks, +rep too.
    Rate of interest increase, people save, less consumption, AD shift inwards
    Vice versa


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    (Original post by bad8oy)
    Rate of interest increase, people save, less consumption, AD shift inwards
    Vice versa


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    (assuming that a household has a fixed income, and the only way of getting extra money is to take out a loan). So, is the rate of interest involved as people need to take out a loan to buy a more expensive item, so demand for borowwed money increases, leading to a higher price (as amount of money is fixed), i.e. the rate of interest and so it reduces consumption as ... (how would I finish it off ??)
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    (Original post by Hi, How are you ?)
    Hi, in my text book, it talks about effect of a rise in price for each component of expenditure (AD) when price rises. It starts off by talking abut consumption, and then it starts talking about the rate of interest, why????

    (if you have the economics Alain Anderton AQA fifth edition textbook, it is on page 183, right at the bottom of the right hand side. )

    Thanks, +rep too.
    Yeah as the person above said.. If interest rates are high, people will save more as the reward for saving is higher. Thus C will decrease and as it is a component of AD (AD=C+G+I+(X-M) causing AD to fall. However, if interest rates are low, people will save less and spend more so C increases. Hope this helps
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    (Original post by bestfriends33)
    Yeah as the person above said.. If interest rates are high, people will save more as the reward for saving is higher. Thus C will decrease and as it is a component of AD (AD=C+G+I+(X-M) causing AD to fall. However, if interest rates are low, people will save less and spend more so C increases. Hope this helps
    Hi, so could I finish it off by saying,

    So, is the rate of interest involved as people need to take out a loan to buy a more expensive item, so demand for borowwed money increases, leading to a higher price (as amount of money is fixed), i.e. the rate of interest and so it reduces consumption as there is a greater incentive to save than to spend so a person disposable income is reduced, hence consumption would reduce because of that, shifting ad to the left?

    is the bit in bold right or wrong??

    I cant rep you today, ran out of rep for today, I will give it to you later
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    (Original post by Hi, How are you ?)
    Hi, so could I finish it off by saying,

    So, is the rate of interest involved as people need to take out a loan to buy a more expensive item, so demand for borowwed money increases, leading to a higher price (as amount of money is fixed), i.e. the rate of interest and so it reduces consumption as there is a greater incentive to save than to spend so a person disposable income is reduced, hence consumption would reduce because of that, shifting ad to the left?

    is the bit in bold right or wrong??

    I cant rep you today, ran out of rep for today, I will give it to you later
    Im not sure if its about disposable income as such..
    Watch this video: http://www.youtube.com/watch?v=2fmfNNwBpik it is really useful & will explain it better than I can.

    Okay thanks that would be good
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    (Original post by Hi, How are you ?)
    Hi, so could I finish it off by saying,

    So, is the rate of interest involved as people need to take out a loan to buy a more expensive item, so demand for borowwed money increases, leading to a higher price (as amount of money is fixed), i.e. the rate of interest and so it reduces consumption as there is a greater incentive to save than to spend so a person disposable income is reduced, hence consumption would reduce because of that, shifting ad to the left?

    is the bit in bold right or wrong??

    I cant rep you today, ran out of rep for today, I will give it to you later
    That all sounds like your blagging it lol.
    Look write this. If interest rates are high, people will want to save more as the cost of borrowing increases. This means the reward for saving also increases. Therefore consumption decreases. C is a component of AD so aggregate demand shifts inwards.
    If I interest rates are low the cost of borrowing decreases meaning people will borrow more as there paying back less. They therefore don't save and increase there spending. Consumption increases AD shifts outwards.
    Income doesn't really change it's to do with how interest rates effect spending habits.

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