Question

An analysis on the effects of determinants of household consumption in an economy. Why is household consumption important to the economy?

Answer 1

Determinates of household consumption are as below:

No.1) Rate of interest: people use to take loan from banks and financial institutions. If the rate of interest increases, people would be having extra burden of paying interest amount. This reduces their consumption. The reverse thing would happen if the rate decreases.

No.2) Rate of taxes: increase in tax decreases disposable income of consumers (Yd). This reduces consumption. If tax rate decreases, consumption increases.

No.3) Savings: sometimes consumers may have future anticipation of economic downfall. This tends to increase their savings today by reducing consumption.

No.4) Natural disaster: if there is any cyclone, earthquake, or pandemic people reduce their consumption because of fear.

No.5) Money supply: at an increasing money supply, consumers may have enough money in their hand to spend. This increases consumption.