Define the term disposable income.
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Define the term disposable income.
Disposable income is the money that households have left over from their salary/wages after they have paid their taxes and have received any transfer payments or benefits from the government.
What happens to consumption when disposable income increases?
Consumption increases as disposable income increases.
True or False?
Consumption decreases when interest rates rise.
True.
If interest rates rise, the cost of borrowing increases, leading to less consumption.
What is the impact of high consumer confidence on spending?
High consumer confidence causes spending to increase. Consumers feel secure in their jobs and are confident of receiving regular salary payments, so they continue to spend freely.
How do low-income households respond to an increase in income?
Low-income households will spend any additional income on necessities or a few basic luxuries; little additional saving occurs.
Define the term savings rate.
The savings rate is the interest rate offered by commercial banks on money deposited in savings accounts.
What is the effect of an increase in the savings rate?
An increase in the savings rate offered by commercial banks incentivises households to save more.
How does economic confidence impact household saving?
The stronger the economy, the higher the economic confidence and the lower the level of household saving.
The weaker the economy, the lower the economic confidence and the higher the level of household saving.
What requirement do commercial banks often have for household borrowing?
Commercial banks usually require security in order to extend a loan.
Which income groups find it easier to access commercial bank loans?
Medium- and high-income households often receive preferential interest rates and obtain loans more easily than low income households.
True or False?
Low income households can easily access borrowing when interest rates fall.
False.
Low income households are usually unable to access borrowing from commercial banks, even when interest rates fall. They are often forced to borrow from sources that charge high interest rates, e.g shark loans.