Analysis

Question 1

What are the main factors which influence consumption in an economy?

Answer 1

1. Income tax rates/Tax-free allowance
2. Interest rates
3. Asset prices - Wealth effect
4. Consumer confidence

Question 2

How does income tax rates/tax free allowance influence consumption?

Answer 2

• High tax rates → Less disposable income → Less consumer spending (and vice versa)
• High tax free allowance → More money can be made without paying tax → More disposable income → More consumer spending (and vice versa)