Consumer spending, saving and credit

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  • Created by: Ellie
  • Created on: 01-02-15 13:59
Describe the absolute income hypothesis
When income levels rise, households spend more and during a recessions consumption falls
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What is Autonomous consumption
Spending on necesities
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What is induced consumption?
spending on none essentials
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Describe the life cycle hypothesis
At the start of peoples careers consumption exceeds income (buying houses) in the midle years workers pay off debt and save (for pensions) Later in life consumptioin increases
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Define dissaving
the action of spending more than one has earned in a given period
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Describe the Permanent income hypothesis
Households have a rate of return based on ownership of assests ( a permanent income) short run shocks will not effect this and therefore dont impact consumption. Only changes to wealth will effect income.
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Describe the confidence hypothesis
When consumer confidence is high households consume more and save less
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Describe the relative income hypothesis
Low income households consume a higher proportion of their income to maintain a stand of living similar to that of richer households
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What influences consumption levels?
National income, interest rates, wealth
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What is a flow?
Income as it represents earnings over a given period of time
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What is a stock?
Wealth as it represents a value of financial worth at a period of time
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What effect does a high proportion of owner occupied homes have on consumption?
It makes consumption more responsive to changes in interest rates and to changes in house prices
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What are some causes of widespread retirement?
high house price inflation, price inelasticsupply of housing in urban areas, demographic changes, decline in confidence of pension schemes, increase in global money supply, income inelastic demand for housing
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What are the impacts of globalisation
Cheaper money in world credit markets, falling prics of consumer durables, greater migration
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Define the accelerator
the action of spending more than one has earned in a given period
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Why does consumer spending collapse?
falling disposable incomes, negative wealth effect, tougher credit conditions, higher savings ratio
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Define Decoupling
the disconnction between the base rate and market rate of interest
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What are the main reasons for saving?
to defer current consumption and fund future consumption
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What factors reduce the savings ratio?
low interest rates and rising house prices
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What factors can increase the savings ratio?
high interest rates, low consumer and business confidence, high levels of indebtness
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Describe the paradox of thrift
every decision to save rather than spend reduces demand and therefore causes unemployment
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What factors can cause a pension crisis?
increased life expectancy, falling birth rate, increased number of people going into further education, family life occuring at a later age, greater labour mobility, less confidence in pension schemes, increased other forms of saving
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What policies tackle the pensions crisis?
higher retirement age, less generous state pension, greater incentives to save, public campaigns, more labour market flexibility, compulsory employer pension contributions
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Other cards in this set

Card 2


What is Autonomous consumption


Spending on necesities

Card 3


What is induced consumption?


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Card 4


Describe the life cycle hypothesis


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Card 5


Define dissaving


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