2.2.2 Flashcards
What are the main sources of incomes for households?
Wages, savings, interest on investments, pensions and benefits.
What is consumption?
Spending on consumer/household goods and services.
What is the biggest component of aggregate demand in the UK?
Consumption
What is marginal propensity to consume?
Change in spending following a change in real income
What is disposable income?
The money that consumers have left to spend after taxes have been taken away and state benefits have been added.
What is the most important factor in determining the level of consumption?
Disposable income
Why do poorer people tend to have a larger marginal propensity to consumer (MPC)?
They are more likely to spend much more of their increase in income whilst richer people are more likely to save it.
What is average propensity to consume(APC)?
The average amount spent on consumption out of total income
What is the equation for marginal propensity to consume?
Change in consumption / change in income
What is the equation for average propensity to consume?
Total consumption / total income
What are factors that affect consumer spending?
-Real disposable income
-Employment and job security
-Household wealth
-Expectations and sentiment
-Interest rates
How does employment and job security affect consumer spending?
When the labour market is improving confidence and income improve
How does household wealth affect consumer spending?
A rise in wealth can increase consumer demand
How does expectations and sentiment affect consumer spending?
Economic uncertainty causes spending to fall, improving animal spirits will list demand.
How does interest rates affect consumer spending?
They affect the incentive to save and the cost of borrowing
What is debt financing?
Borrowing money from an outside source with the promise of paying back the loan, plus interest at a later date.
What are secured loans?
Money you borrow that is secured against an asset you own, usually your home
What are unsecured loans?
Money supported only by a borrower’s creditworthiness
What factors affect household saving?
-Real interest rate
-Price expectation
-Availability of credit
-Unemployment/job security
-Consumer confidence/expectations
-Taxation of savings
-Trust in savings institutions
How does the real interest rate affect household savings?
The nominal interest rate adjusted for inflation.
A positive real interest rate incentivises savings
How does price expectations affect household savings?
If consumers expect price to fall they may choose to save more now
How does availability to credit affect household saving?
Borrowing is dis-saving as spending is current income.
How does unemployment/ job security affect household saving?
When unemployment is rising, many people save more as a precaution as job security declines.
How does consumer confidence / expectations affect household saving?
When consumer confidence is strong, people are more willing to borrow and save less.
