Th2.2: Other Influences on Consumer Spending Flashcards
What are the five factors that affects consumer spending?
interest rates consumer confidence wealth effects distribution of income tastes and attitudes
If interest rates are high, consumption will be…
lower as the price of the good will effectively be more expensive since more interest needs to be payed back
What do high interest rates also increase?
mortgage rates, reducing consumption further
What does a rise in interest rates decrease?
the value of shares and so people experience a negative wealth effect
If people are confident about the future, their spending will…
increase
If high levels of inflation are expected in the future, when will people spend?
asap as it will be a cheaper price, increasing spending
If consumers expect interest rates to fall, when will they spend?
later as things on credit will be cheaper
What is wealth?
a stock of assets
What is the wealth effect (not involving houses explanation)?
a change in consumption following a change in wealth
When is the wealth effect experienced - houses?
real house prices rise as owners now have more wealth so are more confident with spending as they know if they reach financial difficulty they could borrow more against the house, since it is worth more than their current mortgage
When is the wealth effect experienced - share prices?
when share prices rise, people may sell more of their shares and spend the money as they know they have shares to fall back on in case of financial difficulty
How will the wealth effect increase spending?
greater consumer confidence
If money is moved from the rich to the poor, what will happen to consumption?
increase as the poor have a higher MPC
How would a change in the distribution of money in the economy influence consumer spending?
those on higher incomes save a higher percentage of their income and vice versa
How do trends and fashions increase consumer spending?
modern day strong materialistic drive - more materialistic, increase in consumption
