2- Consumption

Question 1

Marginal propensity to consume equation

Answer 1

Change in consumption / change in income

Question 2

Marginal propensity to save equation

Answer 2

Change in saving / change in income

Question 3

Who has a higher MPC poor or rich people?

Answer 3

Poor people as those on higher income tend to save more.

Question 4

Relationship between consumption and savings

Answer 4

An increase in consumption decreases savings so the same factors which affect consumption are those which affect savings- but in the opposite way.

Question 5

Factors affecting consumption

Answer 5

• Disposable income
• Interest rates
• Wealth effects
• Consumer confidence
• Attitudes/ tastes

Question 6

How do interest rates affect consumption?

Answer 6

• Higher interest rates- increase mortgage payments.

- Most major expenditures are bought on credit so higher interest rates, less consumption.

Question 7

How does consumer confidence affect consumption?

Answer 7

• If consumer expect changes in the state of the economy (like an upcoming recession) they will cut spending.

Question 8

How does wealth affect consumption?

Answer 8

• Positive wealth effect increases consumption.
• If consumers have financial difficulties they can borrow against their house as value of house > value of mortgage.
• Confidence of having shares which can be sold.