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MacroEcon Theme 2 CC 1 > Consumer Spending and Saving > Flashcards

Consumer Spending and Saving Flashcards

1
Q

What is Consumption?

A

Total spending by households on goods/services in the domestic economy over a period of time, regardless of where they are produced

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2
Q

What are durable goods?

A

Goods that are consumed over a long period of time

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3
Q

What are non-durable goods?

A

Goods that are consumed almost immediately

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4
Q

What is Disposable Income?

A

Household income over a period of time including state benefits, less direct tax (eg. income tax)

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5
Q

What is Saving?

A

What is not spent out of disposable income, could take form of increasing stock of cash, money in bank or stocks/shares

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6
Q

What is the Consumption function?

A

Relationship between consumption of households and factors that determine it

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7
Q

What are the factors determining consumption?

A

Average Propensity to Consume (APC)
Marginal Propensity to Consume (MPC)
Average Propensity to Save (APS)
Marginal Propensity to Save (MPS)

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8
Q

What is Average Propensity to Consume?

A

Proportion of income spent on goods and services in the domestic economy

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9
Q

How do you work out Average Propensity to Consume?

A 
APC = C / Yd
APC = Consumption / Real Income
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10
Q

What is Marginal Propensity to Consume?

A

Proportion of a change in income which is spent on said goods and services

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11
Q

How do you work out Marginal Propensity to Consume?

A

MPC = change in consumption / change in real income

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12
Q

What is Average Propensity to Save?

A

Proportion of Income saved

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13
Q

How do you work out Average Propensity to Save?

A

APS = savings / real income

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14
Q

What is Marginal Propensity to Save?

A

Proportion that is saved out of change in income

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15
Q

How do you work out Marginal Propensity to Save?

A

MPS = Change in savings / change in real income

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16
Q

What are Nominal Values?

A

Where the effects of inflation are still incorporated into the data

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17
Q

What are Real values?

A

Where the effects of inflation have been taken out

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18
Q

What is Saving?

A

What is not spent out of disposable income

19
Q

What forms can saving take?

A

Increasing stock of cash, money in bank or company shares

20
Q

What is the Household savings ratio?

A

The percentage of household disposable income that is saved

21
Q

What is the Total housing savings?

A

Household disposable income minus household consumption

22
Q

What factors affect savings?

A

Disposable Income
Interest Rates
Consumer Confidence in the future of the economy

23
Q

What are the problems with an economy having a low savings ratio?

A

People won’t have as much money in the future so bad for economy in long term
If there is a recession, there is no cushion/protection to fall back on
Firms can invest by borrowing money from banks, if people don’t save, banks don’t have as much money to lend

24
Q

What are the problems with an economy having a high savings ratio?

A

People aren’t consuming so the economy doesn’t grow as much

People look for other things to put their money into which can be bad

25
Q

What is the Interest Rate?

A

The price of money (cost to borrowers and reward to savers)

26
Q

Why does a decrease in Interest Rates increase consumption?

A

Cost of buying consumer durables on credit falls
Mortgage repayments on variable rate mortgages fall, increasing consumers discretionary income
House and share prices rise (wealth effect)
Consumers have less incentive to save as return on savings fall

27
Q

What are consumer durables?

A

Manufactured items, typically cars or household appliances, that are expected to have a relatively long useful life after purchase

28
Q

What is credit?

A

The ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future

29
Q

What are variable rate mortgages?

A

A type of home loan in which the interest rate is not fixed

30
Q

What affect does consumer expectations of higher future real income have on consumption?

A

Increases consumption NOW

31
Q

Why might a consumer have expectations of higher future real income?

A

(eg. secure job, expect future pay rises, house prices rising)

32
Q

What affect does consumer expectations of harsher economic conditions/lower future income have on consumption?

A

Reduces consumption NOW

33
Q

Why might a consumer have expectations of harsher economic conditions/lower future income?

A

(eg. fear of unemployment, tax increases, real wage falls, pension cuts)

34
Q

What is the Wealth Effect?

A

Change in Consumption following a change in asset prices (eg. house prices, share prices)

35
Q

What are the two ways the wealth of a household can change over a short period of time?

A

House Prices

Value of stocks/shares

36
Q

How can house prices change the wealth of a household over a short period of time?

A

If real price of houses increases considerably, households feel able to increase spending, mainly done by borrowing more money secured against value of the house
(HEW)

37
Q

How do households react to increase in real value of households portfolio of securities?

A

By selling portfolio and spending the proceeds

38
Q

How can value of stocks/shares change the wealth of a household over a short period of time?

A

When interest rate falls, the value of stocks increase and therefore consumption is stimulated through the wealth effect by fall in interest rate

39
Q

What does HEW stand for?

A

Housing Equity Withdrawal

40
Q

What is Housing Equity Withdrawal (HEW)?

A

Borrowing that is secured on the housing stock but not invested in it

41
Q

When does Housing Equity Withdrawal (HEW) occur?

A

When homeowners remortgage, taking out bigger loans to take advantage of rising property values, the money is then used for consumption

42
Q

What does MEW stand for?

A

Mortgage Equity Withdrawal

43
Q

What is Mortgage Equity Withdrawal (MEW)?

A

Net borrowing secured on dwellings that isn’t invested in the housing market

MacroEcon Theme 2 CC 1 (7 decks)

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