June 3, 2023 

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THE GENERAL THEORY: The common name for the book, The General Theory of Employment, Interest, and Money, by John Maynard Keynes. This work laid the theoretical foundations for the modern study of macroeconomics and the specific analysis that has come to be known as Keynesian economics. Published in 1936 during the depths of the Great Depression, The General Theory provided both a theoretical explanation for the cause of the depression and recommendations for policies to correct the problems. It was THE textbook for the serious study of macroeconomics for almost four decades.

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One of several specific aggregate expenditures determinants assumed constant when the aggregate expenditures line is constructed, and that shifts the aggregate expenditures line when it changes. An increase in consumer confidence causes an increase (upward shift) of the aggregate expenditures line. A decrease in consumer confidence causes a decrease (downward shift) of the aggregate expenditures line. Other notable aggregate expenditures determinants include interest rates, federal deficit, inflationary expectations, and exchange rates.
Consumer confidence is the general perception that the household sector has about the current and expected state of the economy. This is usually measured through a random survey of the population to discern whether consumers are relatively more or less optimistic (or pessimistic) about the state of the economy than they have been.

The confidence that consumers have in the economy affects their willingness to undertake consumption expenditures.

  • If households have a high degree of confidence, then they are likely to increase consumption expenditures. Life is good. The time has come to buy a new house.

  • If households have a low degree of confidence, then they are likely to decrease consumption expenditures. Life is bad. The best action is to spend less and save for troubled times.
A change in the consumer confidence, by changing consumption expenditures, induces changes in aggregate expenditures. A boost in consumer confidence increases aggregate expenditures and causes an upward shift of the aggregate expenditures line. A drop in consumer confidence then decreases aggregate expenditures and causes a downward shift of the aggregate expenditures line.

What It Does

Consumer Confidence
Consumer Confidence

The exhibit to the right presents a standard Keynesian economics aggregate expenditures line. Like all aggregate expenditures lines, this one is constructed based on several ceteris paribus aggregate expenditures determinants, such as consumer confidence. They key question is: What happens to this aggregate expenditures line if consumer confidence changes?

More Confident

Suppose, for example, that the economy has been growing steadily for a couple of years. Real production is expanding. Unemployment is down. Inflation is low. Life is good. And, of some importance, the public trusts that the President, Congress, and the Federal Reserve System will NOT do anything disruptive. Perhaps the country has just won a war or achieved another major accomplishment like landing on the moon.

In this case, consumer confidence is bound to increase. The household sector is thus inclined to spend freely, especially on durable goods like cars, houses, furniture, and appliances. The result is that this increase in consumer confidence causes an increase in consumption expenditures and subsequently an increase aggregate expenditures.

To see how a boost in consumer confidence affects the aggregate expenditures line, click the [More Confident] button. The increase in consumer confidence triggers an increase in aggregate expenditures, which is a upward shift of the aggregate expenditures line.

Less Confident

Alternatively, the household sector might begin to lose confidence in the economy if signs of trouble emerge. For example, the growth rate of real production might taper off. The unemployment rate might rise a bit. Perhaps the Chairman of the Federal Reserve System proclaims that the continued expansion is soon to end. Maybe Congress and the President have been negotiating a big tax increase. It might be that political scandal has besieged government.

In this case, consumer confidence is likely to decrease. The household sector is thus inclined to spend less freely, especially reducing expenditures on durable goods, such as cars, houses, furniture, and appliances. Rather than spending as much, they save a little more... just in case! The result of this decrease in consumer confidence causes is a decrease in consumption expenditures and subsequently a decrease aggregate expenditures.

To see how a decline in consumer confidence affects the aggregate expenditures line, click the [Less Confident] button. The decrease in consumer confidence triggers a decrease in aggregate expenditures, which is a downward shift of the aggregate expenditures line.

What Does It Mean?

The importance of the consumer confidence as an aggregate expenditures determinant is fundamental to the business cycle. Household consumption expenditures are the largest of the four expenditure categories, comprising about two-thirds of aggregate expenditures on real production. While consumption is relatively stable compared to the extremely volatile investment, even small changes in this large expenditure category can trigger business-cycle instability. And small changes in consumption can result from changes in consumer confidence.

In fact, even though the household sector is compose of almost 300 million distinct individuals, each with their own likes and dislikes, their own hopes and dreams, they tend to respond to business-cycle conditions in a surprisingly uniform manner. During a recovery, people are optimistic that the worst is over and consumer confidence rises. This confidence helps propel the economy into a prosperous expansion.

However, after an expansion has been in place for several years, people become nervous, wondering when the next contraction will begin. Such anxiety generates a decline in consumer confidence that is reinforced by ANY bad news. Of course, the decline in consumer confidence frequently plays in key role in the ensuing contraction.

Then during a contraction, consumer confidence is low and falling. People perceive only the bad news, doubting that life will every improve. Such low and falling consumer confidence then prolongs the contraction.


Recommended Citation:

CONSUMER CONFIDENCE, AGGREGATE EXPENDITURES DETERMINANT, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2023. [Accessed: June 3, 2023].

Check Out These Related Terms...

     | aggregate expenditures determinants | interest rates, aggregate expenditures determinant | federal deficit, aggregate expenditures determinant | inflationary expectations, aggregate expenditures determinant | exchange rates, aggregate expenditures determinant | physical wealth, aggregate expenditures determinant | financial wealth, aggregate expenditures determinant | change in aggregate expenditures | change in aggregate demand | slope, aggregate expenditures line | intercept, aggregate expenditures line |

Or For A Little Background...

     | aggregate expenditures | aggregate expenditures line | determinants | gross domestic product | consumption expenditures | investment expenditures | government purchases | net exports | Keynesian economics | effective demand | psychological law |

And For Further Study...

     | aggregate market analysis | business cycles | circular flow | monetary economics | aggregate market shocks | Consumer Confidence Index | Index of Consumer Sentiment | consumer confidence, aggregate demand determinant | buyers' preferences, demand determinant | Keynesian model | Keynesian equilibrium | injections-leakages model | aggregate demand | aggregate demand determinants | fiscal policy | multiplier |

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