2.2.2

Question 1

What are the main sources of incomes for households?

Answer 1

Wages, savings, interest on investments, pensions and benefits.

Question 1

What is consumption?

Answer 1

Spending on consumer/household goods and services.

Question 2

What is the biggest component of aggregate demand in the UK?

Answer 2

Consumption

Question 3

What is marginal propensity to consume?

Answer 3

Change in spending following a change in real income

Question 4

What is disposable income?

Answer 4

The money that consumers have left to spend after taxes have been taken away and state benefits have been added.

Question 5

What is the most important factor in determining the level of consumption?

Answer 5

Disposable income

Question 6

Why do poorer people tend to have a larger marginal propensity to consumer (MPC)?

Answer 6

They are more likely to spend much more of their increase in income whilst richer people are more likely to save it.

Question 7

What is average propensity to consume(APC)?

Answer 7

The average amount spent on consumption out of total income

Question 8

What is the equation for marginal propensity to consume?

Answer 8

Change in consumption / change in income

Question 9

What is the equation for average propensity to consume?

Answer 9

Total consumption / total income

Question 10

What are factors that affect consumer spending?

Answer 10

-Real disposable income
-Employment and job security
-Household wealth
-Expectations and sentiment
-Interest rates

Question 11

How does employment and job security affect consumer spending?

Answer 11

When the labour market is improving confidence and income improve

Question 12

How does household wealth affect consumer spending?

Answer 12

A rise in wealth can increase consumer demand

Question 13

How does expectations and sentiment affect consumer spending?

Answer 13

Economic uncertainty causes spending to fall, improving animal spirits will list demand.

Question 14

How does interest rates affect consumer spending?

Answer 14

They affect the incentive to save and the cost of borrowing

Question 15

What is debt financing?

Answer 15

Borrowing money from an outside source with the promise of paying back the loan, plus interest at a later date.

Question 16

What are secured loans?

Answer 16

Money you borrow that is secured against an asset you own, usually your home

Question 17

What are unsecured loans?

Answer 17

Money supported only by a borrower’s creditworthiness

Question 18

What factors affect household saving?

Answer 18

-Real interest rate
-Price expectation
-Availability of credit
-Unemployment/job security
-Consumer confidence/expectations
-Taxation of savings
-Trust in savings institutions

Question 19

How does the real interest rate affect household savings?

Answer 19

The nominal interest rate adjusted for inflation.
A positive real interest rate incentivises savings

Question 20

How does price expectations affect household savings?

Answer 20

If consumers expect price to fall they may choose to save more now

Question 21

How does availability to credit affect household saving?

Answer 21

Borrowing is dis-saving as spending is current income.

Question 22

How does unemployment/ job security affect household saving?

Answer 22

When unemployment is rising, many people save more as a precaution as job security declines.

Question 23

How does consumer confidence / expectations affect household saving?

Answer 23

When consumer confidence is strong, people are more willing to borrow and save less.

Question 24

How does taxation of savings affect household saving?

Answer 24

Interest on many types of saving is taxed, some savings schemes are tax-free or low tax

Question 25

How does trust in saving institutions affect household saving?

Answer 25

Deposit guarantees encourage more saving in commercial banks.