3- Consumption

Question 1

Consumption definition

Answer 1

The total spending by households on goods/services within the economy.

Question 2

Amount of AD that consumption takes about?

Answer 2

Around 60%

Question 3

What determines levels of consumption?

Answer 3

• Disposable income
• Interest rates
• Levels of personal debt
• Confidence
• Levels of personal wealth

Question 4

How does disposable income affect consumption?

Answer 4

Higher levels of disposable income will normally lead to greater levels of consumption as individuals can afford more goods and services. Disposable income will change depending upon for example, tax, wage rates.

Question 5

How does interest rates affect consumption?

Answer 5

Lower interest rates will normally increase consumption as saving becomes less attractive, loans become affordable and individuals with variable rate mortgages see monthly disposable income increase

Question 6

How do levels of personal debt affect consumption?

Answer 6

E.g credit cards or loans they (lower debt) will normally consume more as less disposable income is diverted to repayments.

Question 7

How do levels of personal wealth affect consumption?

Answer 7

Individuals with higher levels tend to consume more as they can borrow funds against the value of their assets e.g. their house

Question 8

Wealth definition

Answer 8

Wealth is a stock concept- it is a large amount of money or valuable possessions (assets) and can be held in different ways.

Question 9

Where can wealth can be held?

Answer 9

• Savings held in bank deposit accounts
• Ownership of shares issued by listed companies and equity stakes in private businesses
• The ownership of property
• Wealth held in bonds
• Wealth held in occupational pension schemes and life assurance schemes

Question 10

What is income?

Answer 10

Income is a flow of money going to factors of production

Question 11

Forms of income?

Answer 11

• Wages and salaries paid to people from their jobs
• Money paid to people receiving welfare benefits such as the state pension and tax credits
• Profits flowing to businesses and dividends distributed to shareholders
• Rental income flowing to people who own and lease out property
• Interest paid to those who hold money in deposit accounts or who own bonds etc.

Question 12

How confidence affects levels of consumption?

Answer 12

If individuals have confidence in their short, medium and long term economic prospects, it is likely that they will increasing their spending.
- This is often linked to their employment prospects or job security