Savings and consumer spending Flashcards
Savings are
The portion of income that is not consumed.
The savings ratio is
The % of disposable income that is saved.
Savings ratio formula
(Savings/disposable income) x 100
What factors affect the savings ratio
- Income
- Expected income/job security
- Wealth
- Interest rate
- Cultural factors
What is a paradox
A true statement or group of statements that leads to a contradiction.
Why are savings good?
Savings will increase the amount of funds banks have available to lend - higher lending to firms will enable increased investment - This will generate higher rate of economic growth in SR and LR
Why are savings bad?
Savings will reduce consumption, so AD falls - This means firms are less likely to borrow - Lower C + I reduces economic growth in SR and LR.
Consumption is
Expenditure by households on goods and services.
- (Largest component of AD)
Factors that affect Consumption
- Disposable Income
- Wealth
- Interest rates
- Expected Income/ job security
Autonomous consumption
- The level of consumption when income is 0
Marginal propensity to consume
- the proportion of additional income that is spent.
(higher for lower incomes) - Those of higher incomes are more likely to save
- MPC affects the size of the spending multiplier.
(£ to poor - more likely to feed into economy.)
What is income
The flow of money
What is wealth
- A stock of assets such a property and shares.
Higher wealth will
- Increase the level of consumer confidence - leading to higher levels of spending
Higher house prices will
- enable people to remortgage (equity withdrawal) to fund higher spending
