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Economics 2.2.2
Economics- Edexcel 2.2.2
| Question | Answer |
|---|---|
| consumption | spending on consumer goods and services |
| Main sources of income for houses | wages, savings, investments, pensions and benefits |
| Where does income come from? | providing factors of production |
| Reward for providing labour | wages |
| Reward for providing land | rent |
| Reward for providing capital | interest |
| Reward for providing entrepreneurship | profit |
| Transfer payments | a payment of money for which there are no goods or services exchanged, e.g. pensions and welfare benefits |
| Marginal propensity to consume | the change in spending following a change in income, so the proportion of additional income that is spent |
| MPC | marginal propensity to consume |
| Formula for MPC | change in spending(C)/change in income(Y) |
| factors affecting consumer spending | real disposable income/employment and job security/household wealth/expectations and sentiment/market interest rates |
| real disposable income | income adjusted for inflation and after direct taxes and benefits |
| how does employment and job security affect consumer spending? | when the labour market is improving, confidence and incomes will improve |
| how does household wealth affect consumer spending? | rise in wealth can increase consumer demand |
| household wealth | house prices and share prices |
| how do expectations and sentiment affect consumer spending? | uncertainty causes spending to fall, improving animal spirits lift demand |
| how do market interest rates affect consumer spending? | interest rates affect both the incentive to save and the cost of borrowing |
| animal spirits | the tendency for investment prices to rise and fall based on human emotion rather than intrinsic value |
| Keynesian economics | the various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation |
| debt financing | borrowing money from an outside source with the promise of paying back the loan, plus interest, later |
| secured loans | money you borrow that is secured against an asset you own, usually your home |
| unsecured loans | money supported only by a borrower’s creditworthiness, rather than by any type of collateral, usually charged at a higher interest rate |
| when does saving occur? | when people decide to postpone consumption until a future time |
| deferred spending | saving is household disposable income that is not spent |
| Yd | disposable income |
| formula for Yd | C + S |
| APS | average propensity to save |
| average propensity to save | saving ratio for households that measures the amount of money households have available to save as a percentage of their total disposable income |
| high APS | lowers consumption and AD |
| MPS | marginal propensity to save |
| marginal propensity to save | amount of additional income that is saved |
| formula for MPS | change in S over the change in Y |
| key factors that can change the level of household saving | real interest rate/price expectations/availability of credit/unemployment or job security/consumer confidence and expectations/taxation of savings/trust in saving institutions |
| real interest rate | the nominal interest rate adjusted for inflation |
| how does the real interest rate change the level of household saving? | positive interest rate incentivises saving |
| how does price expectations change the level of household saving? | if consumers expect prices to fall in the future they may choose to save more now |
| how does availability of credit change the level of household saving? | borrowing is dissaving as they are spending more than than their current income |
| how does unemployment and job security change the level of household saving? | when unemployment is rising many people save more as a precaution as job security declines |
| how does consumer confidence and expectations change the level of household saving? | when consumer confidence is strong people are more willing to borrow and save less |
| how does taxation of savings change the level of household saving? | interest on many types of saving is taxed, some saving schemes are tax-free or low tax |
| how does trust in saving institutions change the level of household saving? | deposit guarantees can encourage more saving in commercial banks |
| dissaving | the action of spending more than one has earned in a given period |
| why is saving important? Business survival: | corporate savings provide a cushion during a recession when sales and revenue fall, business savings can be used as finance for takeovers and capital investment projects |
| why is saving important? Funding investment: | commercial banks need savings deposits from which they can lend to borrowers, savings flow into pension funds and can be reinvested in stock markets providing investment funds |
| why is saving important? Buffer of financial resources for consumers: | savings can smooth consumption during tough economic times, allow people to reduce debts and are a key source of retirement income(smooth consumption over one’s life) |
Created by:
jessharris
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