2.2.2 - Consumer spending

Question 1

How does disposable income influence consumer spending?

Answer 1

• Made up of income plus benefits less taxes
• Rise in disposable income increases the spending power of consumers

Question 2

How does the rate of savings influence consumer spending?

Answer 2

• Savings accounts, ISAs, putting money under the mattress – all count as saving (i.e. not spending)
• A higher rate of savings means consumers are spending less of their incomes

Question 3

How do interest rates influence consumer spending?

Answer 3

• Households will borrow money to buy items like cars, houses, furniture, etc.
• If the rate of interest goes down then it costs less to borrow money (i.e. you pay back less)
• So a fall in interest leads to a rise in the level of consumption

Question 4

How does consumer confidence influence consumer spending?

Answer 4

• Households’ expectations of their future incomes may affect how they spend money today
• If households expect an improvement in the economy the future they will tend to increase their spending (possibly through borrowing)

Question 5

How does wealth influence consumer spending?

Answer 5

• Wealth can be monetary (cash, shares, pensions) or physical (houses, cars, antiques)
• Wealth creates income through interest, dividends, rent, etc.
• Many people’s largest ‘asset’ is the value of their house (if they own their house, but not if they rent)
  • A rise in house prices allows a homeowner to re-mortgage their house to create funds for spending

Question 6

What is net investment?

Answer 6

Net Investment: gross investment less depreciation
- If net investment is positive, the total capital stock of the economy is expanding
- If net investment is negative (for example during an economic downturn) then the country’s capital stock may actually deteriorate

Question 7

What is gross investment?

Answer 7

Gross Investment: It is total capital spending.
Total amount of investment made in an economy.

Question 8

How does the rate of economic growth influence investment?

Answer 8

When there is spare capacity there is less need for investment, so a stronger economy tends to lead to greater investment

Question 9

How does business confidence influence investment?

Answer 9

• Businesses will only invest if they feel confident that the risk is low enough to justify it
  •Strong link to the economic cycle

Question 10

What are animal spirits?

Answer 10

It is how people arrive at financial decisions, including buying, selling securities, in times of economic stress or uncertainty.

Question 11

How do animal spirits influence investment?

Answer 11

• It is a term used by Keynes (1936) to describe how business confidence (financial decision making) can be driven by human emotion in volatile times
• If spirits are low then confidence levels will be low which will drive down a promising market.

Question 12

How does the demand for exports influence investment?

Answer 12

A boom in trading partner economies increases demand for exports – likely to increase domestic investment

Question 13

How do interest rates influence investment?

Answer 13

A fall in interest rates make borrowing money cheaper and makes more investment projects profitable

Question 14

How does access to credit influence investment?

Answer 14

• Greater access to credit (lending) means firms find it easier to be given loans
• This increases the available funds that firms have for investment

Question 15

How do government regulations influence investment?

Answer 15

Lower levels of corporation tax and less strong regulation is likely to lead to businesses choosing to invest more.