Aggregate Demand - Consumption Flashcards
What is disposable income
Income that a consumer actually has to spend after tax
As disposable income rises , we would expect consumption to ______
Rise
What is marginal propensity to consume
The proportion of additional consumption devoted to spending rather than saving
Generally, _______-income consumers spend a larger proportion of their income, so they will have a _________ marginal propensity to consume than those on _________ incomes
Lower
Greater
Higher
Households saving and spending and spending are _________ related: the more you save, the less you have to spend
Inversely
What is the household savings ratio
The (average) proportion of disposable income that is saved rather than spent on consumption across the economy
If the household savings ratio increases, we would expect consumption to _______
Fall
Determinants of consumer spending
Interest rates
Consumer confidence
Wealth effects
How do interest rates determine consumer spending?
What happens when interest rates are high?
At high interest rates, saving becomes more appealing and borrowing becomes more costly, so consumption is likely to fall
How does consumer confidence determine consumer spending
If consumer confidence is high - due to optimism. consumption is likely to rise
How does wealth determine consumer spending
Increases in the value of people’s assets is another factor that can increase consumption, as people feel wealthier. This is related to the consumer confidence idea