2.2.2 consumption (C)

What is disposable income?

Disposable income is the income left over for an individual or household after taxes have been paid.

Why is disposable income important for consumer spending?

Disposable income is a crucial determinant of consumer spending because it represents the money available for consumption and saving.

What is the general relationship between disposable income and consumer spending?

Generally, as disposable income increases, consumer spending tends to rise.

What is the marginal propensity to consume (MPC)?

The MPC is the proportion of an additional dollar of income that a consumer spends.

If the MPC is 0.8, what does that mean?

It means that for every additional dollar of disposable income, the consumer will spend 80 cents and save 20 cents.

How do changes in interest rates impact both consumption and investment?

Higher interest rates reduce consumption (by increasing savings incentive) and investment (by increasing borrowing costs).

How does consumer confidence influence saving behavior?

Higher consumer confidence leads to lower savings and higher consumption.

What is a real-world example of reduced disposable income affecting spending?

During an economic downturn, people may experience a decrease in disposable income due to job losses, leading to reduced consumer spending and negatively impacting businesses.

What are savings in the context of income?

Savings are the portion of income that is not spent on consumption.

What is the relationship between savings and consumption?

There is an inverse relationship – when consumers save more, they spend less, and when they save less, they spend more.

What is a real-world example of lower savings leading to higher consumption?

During economic booms, people may feel more financially secure and reduce their savings rate, leading to increased consumer spending on items like luxury goods, travel, and dining out.

How do lower interest rates influence consumer spending?

Lower interest rates reduce borrowing costs, which tends to stimulate consumer spending.

Give an example of how low interest rates can boost spending.

When mortgage interest rates are low, more people may buy homes, which leads to increased spending on furniture and home-related goods.

What is consumer confidence?

Consumer confidence reflects the optimism or pessimism of consumers about the future of the economy.

How does consumer confidence affect spending?

Higher consumer confidence generally leads to increased consumer spending, as people are more willing to make major purchases when they believe the economy is doing well.

What are wealth effects in relation to consumer spending?

Wealth effects occur when changes in asset values, such as home or stock prices, influence consumer spending behaviour.

How do rising asset values affect spending?

When the value of assets increases, consumers tend to feel wealthier and increase their spending.

How do falling asset values affect spending?

Declining asset values can lead to reduced consumer spending, as consumers feel less wealthy.

What is a real-world example of wealth effects increasing spending?

During the housing market bubble in the mid-2000s, rising home prices made many homeowners feel wealthier, leading to higher spending on home improvements and luxury goods.