Economics- Edexcel 2.2.2
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| consumption | spending on consumer goods and services
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| Main sources of income for houses | wages, savings, investments, pensions and benefits
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| Where does income come from? | providing factors of production
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| Reward for providing labour | wages
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| Reward for providing land | rent
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| Reward for providing capital | interest
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| Reward for providing entrepreneurship | profit
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| Transfer payments | a payment of money for which there are no goods or services exchanged, e.g. pensions and welfare benefits
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| Marginal propensity to consume | the change in spending following a change in income, so the proportion of additional income that is spent
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| MPC | marginal propensity to consume
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| Formula for MPC | change in spending(C)/change in income(Y)
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| factors affecting consumer spending | real disposable income/employment and job security/household wealth/expectations and sentiment/market interest rates
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| real disposable income | income adjusted for inflation and after direct taxes and benefits
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| how does employment and job security affect consumer spending? | when the labour market is improving, confidence and incomes will improve
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| how does household wealth affect consumer spending? | rise in wealth can increase consumer demand
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| household wealth | house prices and share prices
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| how do expectations and sentiment affect consumer spending? | uncertainty causes spending to fall, improving animal spirits lift demand
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| how do market interest rates affect consumer spending? | interest rates affect both the incentive to save and the cost of borrowing
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| animal spirits | the tendency for investment prices to rise and fall based on human emotion rather than intrinsic value
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| Keynesian economics | the various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation
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| debt financing | borrowing money from an outside source with the promise of paying back the loan, plus interest, later
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| secured loans | money you borrow that is secured against an asset you own, usually your home
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| unsecured loans | money supported only by a borrower’s creditworthiness, rather than by any type of collateral, usually charged at a higher interest rate
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| when does saving occur? | when people decide to postpone consumption until a future time
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| deferred spending | saving is household disposable income that is not spent
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| Yd | disposable income
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| formula for Yd | C + S
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| APS | average propensity to save
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| 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
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| high APS | lowers consumption and AD
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| MPS | marginal propensity to save
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| marginal propensity to save | amount of additional income that is saved
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| formula for MPS | change in S over the change in Y
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| 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
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| real interest rate | the nominal interest rate adjusted for inflation
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| how does the real interest rate change the level of household saving? | positive interest rate incentivises saving
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| 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
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| how does availability of credit change the level of household saving? | borrowing is dissaving as they are spending more than than their current income
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| 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
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| 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
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| 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
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| how does trust in saving institutions change the level of household saving? | deposit guarantees can encourage more saving in commercial banks
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| dissaving | the action of spending more than one has earned in a given period
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| 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
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| 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
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| 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)
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