2.2.2 - Consumption C

Question 1

Define disposable income

Answer 1

“the amount of money that individuals and families have available for spending or saving after they have paid their direct taxes and received any state welfare benefits. Direct taxes include income tax, national insurance and (local) council tax.”

Gross income less income tax and national insurance contributions plus welfare benefits

Question 2

What is the influence of disposable income on consumer spending

Answer 2

• As disposable income increases, so does consumption (generally)
• rate at which consumption rises is usually lower than the rate at which income increases because households tend to save income as well

Question 3

Define marginal prospensity to consume (MPC)

Answer 3

• proportion of additional income devoted to consumption
• MPC = change in consumption/change in income

Question 4

Define marginal propensity to save

Answer 4

the proportion of an increase in disposable income tht households would devote to saving

Question 5

define household wealth

Answer 5

The monetary value of assets – including property, shares, savings, pension fund assets.

Question 6

What is the importance of consumption in AD

Answer 6

• largest component of AD
• increase in c increases AD

Question 7

What is the relationship between consumption and saving

Answer 7

• income can be saved or consumed
• when consumption is high, saving tends to be low

Question 8

What are the other influence on consumer spending

Answer 8

• interest rates
• consumer confidence
• wealth effects

Question 9

Define consumer confidence

Answer 9

Expectations about the future including interest rates, incomes and jobs (measure of how optimistic consumers are about these things)

Question 10

Define consumption

Answer 10

total planned house spending
spending by households on goods & services

Question 11

How does consumer confidence impact consumption

Answer 11

When CC is high, consumers feel more confident about the economy and their own financial situation, so spend more and save less. This means consumption rises and AD rises so rightwards shift in AD curve
- CC determined by recession; reduces confidence in economy as they worried about losing jobs.
- decrease in CC, decreases Consumption, decreases AD, leftwrad shift in AD curve

Question 12

how do interest rates affect consumer spending

Answer 12

• High interest rates = less consumer spending because
• consumers save more to take advantage of higher rates
  less likely to borrow money or buy things on credit because it’s more expensive
• consumers may also have less money to spend if interest rates on existing loans and mortgages increase

Question 13

how do wealth effects affect consumer spending

Answer 13

rise in household wealth ( bc of rise in house prices) = rise in consumer spending and reduction in saving
- bc of consumer confidence; if house prices rise faster than inflation, homeowners feel more confiendent about their finances

Question 14

Define average propensity to consume

Answer 14

the proportion of income that households devote to consumption