What would be the effect of a rise in consumption in the economy, use a diagram to help illustrate this effect.

A rise in consumption in the economy would cause an increase in aggregate demand. This is because the formula of aggregate demand is C+I+G+(X-M), with the C standing for consumption. Therefore, a rise in consumption would increase the value of the equation causing an increase in AD. This can be shown in an AD/AS diagram with a rightward shift of the AD curve. The effect of this on the economy would be a rise in real GDP from Y1 to Y2 and a rise in the general price level from P1 to P2. This shows that a rise in AD leads to rising real GDP so increased output for an economy due to higher consumption, meaning greater levels of output are needed to match this rise in demand. It will also lead to inflation, as if there is an increase in demand firms may increase prices in order to maximise profits. Or prices may rise as a result of supply not being able to meet the new levels of demand, so the rise in price forces some consumers to leave the market.Diagram to be drawn during interview.