Consumer Spending and Saving

Question 1

What is Consumption?

Answer 1

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

Question 2

What are durable goods?

Answer 2

Goods that are consumed over a long period of time

Question 3

What are non-durable goods?

Answer 3

Goods that are consumed almost immediately

Question 4

What is Disposable Income?

Answer 4

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

Question 5

What is Saving?

Answer 5

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

Question 6

What is the Consumption function?

Answer 6

Relationship between consumption of households and factors that determine it

Question 7

What are the factors determining consumption?

Answer 7

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

Question 8

What is Average Propensity to Consume?

Answer 8

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

Question 9

How do you work out Average Propensity to Consume?

Answer 9

APC = C / Yd
APC = Consumption / Real Income

Question 10

What is Marginal Propensity to Consume?

Answer 10

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

Question 11

How do you work out Marginal Propensity to Consume?

Answer 11

MPC = change in consumption / change in real income

Question 12

What is Average Propensity to Save?

Answer 12

Proportion of Income saved

Question 13

How do you work out Average Propensity to Save?

Answer 13

APS = savings / real income

Question 14

What is Marginal Propensity to Save?

Answer 14

Proportion that is saved out of change in income

Question 15

How do you work out Marginal Propensity to Save?

Answer 15

MPS = Change in savings / change in real income

Question 16

What are Nominal Values?

Answer 16

Where the effects of inflation are still incorporated into the data

Question 17

What are Real values?

Answer 17

Where the effects of inflation have been taken out

Question 18

What is Saving?

Answer 18

What is not spent out of disposable income

Question 19

What forms can saving take?

Answer 19

Increasing stock of cash, money in bank or company shares

Question 20

What is the Household savings ratio?

Answer 20

The percentage of household disposable income that is saved

Question 21

What is the Total housing savings?

Answer 21

Household disposable income minus household consumption

Question 22

What factors affect savings?

Answer 22

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

Question 23

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

Answer 23

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

Question 24

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

Answer 24

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

Question 25

What is the Interest Rate?

Answer 25

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

Question 26

Why does a decrease in Interest Rates increase consumption?

Answer 26

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

Question 27

What are consumer durables?

Answer 27

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

Question 28

What is credit?

Answer 28

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

Question 29

What are variable rate mortgages?

Answer 29

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

Question 30

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

Answer 30

Increases consumption NOW

Question 31

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

Answer 31

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

Question 32

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

Answer 32

Reduces consumption NOW

Question 33

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

Answer 33

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

Question 34

What is the Wealth Effect?

Answer 34

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

Question 35

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

Answer 35

House Prices | Value of stocks/shares

Question 36

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

Answer 36

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)

Question 37

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

Answer 37

By selling portfolio and spending the proceeds

Question 38

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

Answer 38

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

Question 39

What does HEW stand for?

Answer 39

Housing Equity Withdrawal

Question 40

What is Housing Equity Withdrawal (HEW)?

Answer 40

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

Question 41

When does Housing Equity Withdrawal (HEW) occur?

Answer 41

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

Question 42

What does MEW stand for?

Answer 42

Mortgage Equity Withdrawal

Question 43

What is Mortgage Equity Withdrawal (MEW)?

Answer 43

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