Theme 2- Consumption (key terms)

Question 1

The consumption function

Answer 1

The relationship between real incomes, consumption, spending and disposable income

Question 2

Average Propensity to Consume (APC)

Answer 2

This is an overall measure of the proportion of income households devote to consumption

Question 3

Marginal Propensity to Consume (MPC)

Answer 3

This is a measure of how much of any increase in household incomes is consumed or spent

Question 4

Marginal propensity to Withdraw (MPW)

Answer 4

This is a measure of how much any increase in household incomes is saved (MPS), taxed by government (MPT) or spent on imports from abroad (MPM)

Question 5

Interest rates

Answer 5

The cost of borrowing and the reward for saving

Question 6

Wealth

Answer 6

The value of assets held by a household
This is a stock - whereas income is a flow concept

Question 7

Wealth effects

Answer 7

The effect on a household’s consumption when your wealth rises or falls. When you have more wealth you will spend more.

Question 8

Consumer confidence

Answer 8

A measure of how confident households feel about the economy. Higher consumer confidence usually leads to higher consumption

Question 9

Consumer durables

Answer 9

Products such as washing machines or computer screens that are not used up immediately when consumed and which provide a flow of services over time

Question 10

Household income

Answer 10

The financial resources available to households to spend or save:
* Original income: Income from jobs, private pensions, interest from savings
* Gross income = original income + cash benefits
* Disposable income = gross income minus direct taxes
* Post-tax income = disposable income minus indirect taxes

Question 11

Negative equity

Answer 11

When the value of an asset falls below the debt left to pay on that asset - term is most commonly used in connection with property prices after a slump in house prices

Question 12

Pension fund

Answer 12

Fund that pools employees’ pension benefits and holds them so that they can be paid at retirement.
- Invested in stocks, bonds and other assets to boost returns and ensure that there are sufficient funds to be paid out

Question 13

Personal allowance

Answer 13

The amount of income you can earn before you start paying income tax. It is £12,500 in 2019

Question 14

Precautionary saving

Answer 14

Saving because of fears of a loss of real income or rising unemployment

Question 15

Unsecured credit

Answer 15

Credit not secured by another asset –i.e. money borrowed on credit cards