Question

In: Economics

What factors are important to a consumer in making his or her consumption–savings decision?

What factors are important to a consumer in making his or her consumption–savings decision?

Solutions

Expert Solution

The following factors are important to a consumer in making his/her consumption-savings decision.


a) The Level of Income: Consumption decision is largely dependent on income. A consumer spends more when his income is high. People with higher income spend more than people with lower income because they have extra money to spend after their necessary expenditure and saving.


b) Consumer's Expectation: Consumer expenditure depends largely on expectations of the future. If inflation is expected in near future, then people will purchase durable goods whose prices may rise after few days.If people expect deflation in near future then they will wait till prices fall. So consumer expenditure vary depending on the expectations of future.


c) Interest Rate: Normally, people like to get more by investing little. They save more when the rate of interest is high and vice-versa. When rate of interest rises people are interested to save more by reducing their consumption.


d) Taxes: The taxation policy of the Government also has some influence on aggregate consumption. When there is an increase in the level of taxes, people's disposable income will fall. This will result in a reduction of both consumption and saving.


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