Question

Explain and graphically illustrate the impact of COVID-19 on consumer spending and aggregate demand using at least two (2) determinants of consumer spending.

A high-quality response must include the steps leading up to the change in the determinate. For example, if I were to make the claim that consumer debt increased, I would have to first explain how I moved from COVID-19 to a rise in consumer debt, and then trace out the effects on consumer spending and aggregate

Answer 1

Covid-19 led to fall in the level of consumption expenditure in the economy. The two determinants which led to fall in the level of Consumption are as follows:

1. Fall in income level of individuals: The pandemic reduced the level of production and sales in the economy because people were staying at their homes and not moving out. Thus, fall in demand by people reduce income level of firms and this reduced wages of workers. Reduction in wages led to fall in disposable income of the consumers and fall in disposable income reduced the level of consumpotion expenditure in the economy.

2. Pessimism in the economy - There have been reports that pandemic led to fall in the level of economic activity and GDP of the nations have decreased. This increased negative sentiment among people and thus increased the level of pessimism in the economy and this negative sentiment reduced the consumption expenditure in the economy.

The following diagrams shows the imapct on consumption function and AD- AS model of the economy where decrease in consumption expenditure has led to decrease in the level of aggregate demand and leftward shift of aggregate demand leading to fall in price level and level of Real GDP of the economy.