Use the data and your economic knowledge, assesses the likely impact of substantial cuts in public expenditure on the performance of the UK economy
Some economist argue that the performance of the UK economy depends on the level of aggregate demand within the economy, aggregate demand is defined as the demand for all goods and services in an economy, the components which make up aggregate demand are consumer spending (C), capital investments (I), government spending (G), exports (X) and imports (M), and the formula for this is AD = C+I+G+(X-M).
Cuts in public expenditure are likely to involve the losses in jobs, as stated in extract B it would reduce the ‘quantity’ as those employed in the public sector would be out of work as the business wouldn’t be able to pay them. This will reduce aggregate demand has gone down and as shown in the diagram below this causes a leftward shift in the AD curve to AD2, as a result real output would decrease to Y1. The reason for this is because as people have lost their jobs they won’t have any income coming into the household, this means demand for goods and services will decrease as consumer spending decreases which could then lead to more jobs being lost in other sectors due to the deficient demand and a downward multiplier effect.
Another reason why aggregate demand would fall due to a loss in consumer spending is due to the disposable income, as there will be cuts in public expenditure it is most likely that there will be cuts on welfare benefits so consumers will start to save more instead of spend. Similarly, as consumer spending which adds to aggregate demand, if it were to fall then the aggregate demand is likely to decrease and following on from this it also effects investments. As aggregate demand falls businesses will be less confident with their investments, therefore investments will fall which would decrease economic growth thus causing prices to fall and as...