2.2.2- Consumption

Question 1

What is consumption?

Answer 1

Spending on consumer goods and services over a period of time

Question 2

What is disposable income?

Answer 2

The amount of income left over after taxes have been taken away

Question 3

Where does income come from?

Answer 3

wages, savings, rent, pensions, benefits, and investments

Question 4

What is the marginal propensity to consume?

Answer 4

How much a consumer changes their spending following a change in income

Question 5

What are most people’s MPC?

Answer 5

Less than 1 but positive

Question 6

Why do some people have a MPC above 1?

Answer 6

They use borrowing or savings to fulfil the demand for goods which is higher than their increase in income

Question 7

Who is most likely to have a higher MPC?

Answer 7

Poorer people as they are likely to spend more of their increase in income

Question 8

What is the average propensity to consume?

Answer 8

The average amount spent on consumption out of total income

Question 9

What is the APC likely to be in rich industrialised countries?

Answer 9

Less than 1 as people save some of their earnings

Question 10

What is the formula for MPC?

Answer 10

change in consumption/ change in income

Question 11

What is the formula for APC?

Answer 11

total consumption/ total income

Question 12

What is the marginal propensity to save?

Answer 12

How much of an increase in income is saved

Question 13

What is the average propensity to save?

Answer 13

The average amount saved out of income

Question 14

What are the influences on consumer spending?

Answer 14

-interest rates
-consumer confidence
-wealth effects
-distribution of income
-availability of credit
-inflation

Question 15

Why do interest rates influence consumption?

Answer 15

Lower interest rates mean it’s cheaper to borrow so reduces the incentive to save. It also lowers the cost of debt so consumers have more disposable income

Question 16

Why does consumer confidence influence consumption?

Answer 16

Higher confidence levels mean consumers spend more as they are less concerned about saving for the future

Question 17

What may consumers do if they expect high levels of inflation?

Answer 17

Buy now as it will be at a cheaper price

Question 18

Why do wealth effects influence consumption?

Answer 18

If the value of assets rise, people feel wealthier, increasing their confidence so they spend more. They also experience a rise in equity, so may be spending less on their mortgage than the house is worth, increasing confidence

Question 19

What is housing equity?

Answer 19

The difference between the market value of a property and how much loan is remaining to be paid

Question 20

Why does distribution of income influence consumption?

Answer 20

If money is moved from the rich to the poor, consumption is likely to increase as the poor have a higher MPC

Question 21

Why does availability of credit influence consumption?

Answer 21

High availability increases consumer spending

Question 22

Why does inflation influence consumption?

Answer 22

It erodes income and purchasing power, reducing spending