Question

Explain 5 incentives which influences how households on aggregate divide their income between consumption and savings

Answer 1

1). Income: As we know that “Consumption” as well as “Savings” both depends on “Income”. Usually an individual always want to smooth its consumption, => if a particular individual having higher present income compare to “future”, then the individual may want to consume less and save more for future to smooth the level of consumption. Similarly, if present income lower compare to “future income”, then the individual may want to consume more and save less for future to smooth the level of consumption.

2). Interest rate: As we know that “interest rate” is the reward to lending, => “interest rate” increases, => that induce the people to save more to get higher return, => people may choose to save more and consume less.

3). Inflation rate: inflation rate play a very important role to influence the level of saving and consumption. If there is a huge expectation that the future inflation rate will increase, => real income of the people adversely effected, => people may choose to reduce current consumption and save more for future.

4). Adverse Economic Condition: In “Adverse Economic Condition” people may feel unsecure. So, they change their spending pattern starts saving more for future and consume less today.

5). Sales effort by private organization: Many times people change their spending pattern as sales effort made by private organization. They reduce their saving plan and consume more today.