2.2.2 - Consumption

Question 1

What is consumption

Answer 1

• total expenditure by households in the economy on goods and services
• consumption = change in savings/change in income

Question 2

What is the marginal propensity to consume

Answer 2

• the change in spending following a change in income
• change in consumption/change in income

Question 3

Factors affecting consumption

Answer 3

• level of real disposable income
• interest rates/availability of credit
• consumer confidence
• asset prices
• household indebtedness

Question 4

What is the savings ratio

Answer 4

• savings ratio for households measured the amount of money households have available to save as a percentage of their disposable income
• savings ratio = total savings/total income

Question 5

Factors affecting household saving

Answer 5

• real interest rate
• price expectations
• availability of credit
• unemployment/job security
• consumer confidence/expectations
• taxation of savings
• trust in savings institutions

Question 6

The important of saving - business survival

Answer 6

• corporate savings provide a cushion during a recession when sales and revenues are falling
• business savings can be used as finance for takeovers and also for capital investment projects

Question 7

The importance of saving - funding investment

Answer 7

• commercial banks need savings deposits from which they can lend to borrowers
• saving flow into pension funds - these can be reinvested in stock markets providing investment funds

Question 8

Importance of saving - buffer of financial resources for consumers

Answer 8

• savings can smooth consumption during tough economic times
• they allow people to reduce their debts
• savings are a key source of retirement income
• savings allow households to make big purchases
• savings allow households to build up deposits to put towards a house purchase