Question

How people's expectations affect consumption?

Answer 1

Market preferences apply to household economic outlook. Expectations can have an significant impact on actual economic activity. If people expect the economic outlook to improve they will be more willing to borrow and buy goods. Yet they would slash expenses with low expectations, and be more risk-averse.

Additionally, expectations can influence the impact of a government decision. For example, if the government cut taxes and fund them by borrowing more, some customers at least, would expect the tax cut to be temporary, and in the future taxes to increase to pay off the government debt. Consumers would also not be investing the tax cuts.

If we assume that the generation of baby boom suppresses consumption according to their life cycle, then the above analysis enables us to make the following policy implication: "Baby boom generation consumption can be accelerated by increasing expected inflation." Specifically, "implementation of income tax reduction and assessed sales tax rises targeting luxury spending" will be an efficient package of policies. It is especially promising to revise the ratio of direct to indirect taxes while simultaneously increasing demand for consumption so as to avoid incurring additional financial burden.