Assess the likely impact on the UK economy of an ‘increase in consumption’

Edexcel AS-Level Economics Paper 2 June 2020 Extract

Assess the likely impact on the UK economy of an ‘increase in consumption’ (Extract A, lines 5–6). Use an aggregate demand and aggregate supply diagram in your answer. (10 marks)

1. An increase in consumption will lead to more economic growth in the UK.
2. Figure 1 shows that household consumption increased by nearly 117% between 1998 and 2018.
3. Consumption refers to spending on goods and services produced in the UK.
4. Consumption is a component of aggregate demand.
5. The diagram below shows an increase in aggregate demand and how it leads to an increase in the price level to p2 and an increase in real gdp to y2.

However, the overall impact of greater consumption depends on the original state of the economy. For example, if the economy is clsoer to full employment, then greater consumption will cause very little growth and a lot more inflation as the economy experiences a positive output gap. This would not be the case if there was spare capacity in the economy as the economy would be able to grow without experiencing inflationary pressure.

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