Question

1.2 At every income level, many people fall into the category of spending more than they earn, thereby accumulating debt.

With reference to the statement above briefly describe how the following factors may contribute:

1.2.1 Access to credit

1.2.2 Credit cards

1.2.3 Car loans

1.2.4 Influence of others

1.2.5 Spending to feel good.

Answer 1

first-factor Access to credit

there is a simple law of macroeconomics that if you higher access of credit then your consumption ratio will also be higher logic behind this is, if somebody can easily get the credit then he or she won't defer his or her desires to buy to something just because of lack of money one can easily buy one's products just by taking credit this is supported by the following equation

C= a+bY - ix

where C = consumption, a = autonomous consumption , b=marginal propensity to consume,Y= disposable income of a person,

i = interest rate

we know that if interest rates get lower, credit becomes easily accessible and this equation shows that if the interest rate gets down consumption goes up. i.e. higher the access to credit, higher the consumption

factor 2 credit cards

credit cards are nothing but the tool to make the credit easily accessible, in credit cards we get a credit limit (say 5000$)

we can spend this money to do whatever we like we just need to deposit an amount equivalent to withdrawn amount to make the balance again 5000$ often these credit limits are interest-free so it is like transferring money from one bank to another bank this way credit card made credit easily accessible which results in higher consumption.

car loan

again refers to the same concept easy credit, assume if somebody wants to buy a car of 20000$ his current income status doesn't allow for this so he was about to defer this spending but then comes a financial institution or bank which agreed to provide a car loan in which bank will give him the money to buy the car and he will repay this money to the bank in smaller installments over a long period of time now this person will consider buying this car.

influence of others:

this works as a social pressure due to competition feeling for example if someone in our family or friend circle has bought some new cool gadgets which we were planning to buy but due to deficit of funds we delayed this spending but when our friend showed that to us it boosted our desire to buy that gadget so this way the influence of others can increase our level of spending.

spending to feel good

this one least affect the spending level because we are not socially or economically influenced here this is purely our psychological and physical need which we want to fulfill for example if we are walking through the desert then we will be so much trust that we will be ready to pay any amount for water or any other drink just to feel good.