3.2 Households

Question 1

What three factors affect a household’s spending, saving and borrowing?

Answer 1

1. Changes to income
2. Changes in interest rates
3. Changes to confidence levels

Question 2

How do changes to income affect spending?

Answer 2

Disposable income increases –> consumption increases
Disposable income decreases –> consumption decreases

Question 3

How do changes to interest rates affect spending?

Answer 3

Interest rates increase –> cost of borrowing & monthly repayment on existing loans increase –> disposable income decreases –> consumption descreases

Question 4

How do changes to confidence levels affect spending?

Answer 4

Strong economy –> households confident in salary/job security –> consumption increases

Question 5

How do changes to income affect saving?

Answer 5

• Low income: little saving occurs
• Medium income: saving and consumption increase
• High income: saving significantly increases

Question 6

How do changes to interest rates affect saving?

Answer 6

• Change in interest –> change in savings rate
• Savings rate increases –> saving increases (and vice versa)

Question 7

How do changes to confidence levels affect saving?

Answer 7

Strong economy –> households confident –> less saving
Unstable economy –> households fearful of future –> more saving

Question 8

How do changes to income affect borrowing?

Answer 8

• Low income: difficult to access bank loans (higher interest rates)
• Medium income: Income rises –> borrowing increases
• High income: Preferential interest rates so take large loans

Question 9

How do changes to interest rates affect borrowing?

Answer 9

• Low income: difficult to access bank loans (higher interest rates)
• Medium & high income: interest rates decrease –> borrow more as it is now cheaper

Question 10

How do changes to confidence levels affect borrowing?

Answer 10

Strong economy –> households confident –> more borrowing
Strong economy –> households less confident –> less borrowing