Answer to Question #134258 in Macroeconomics for lesego

Question

You are given the following information about a closed economy with no government: Consumption = 115 + 0.6Y Investment = 550 Use the above information to answer the questions that follow:
Q.4.5 Identify any three non‐income determinants of consumption

Answer 1

Mainly, the level of consumption is determined by the level of disposable income which is an income factor. However, there are non-income factors which affect the level of consumption and these include;

1).People's expectations about what will happen to prices and their income.

If people expect prices of products to be higher in the near future, then they tend to buy more at present so as to avoid the high prices later and this created a greater amount of current consumption than it could have been. Similarly, if people expect their income to increase in the near future, they tend to spend more on the current income hence increasing consumption level.

2). The cost and availability of consumer credit.

This is the cost of borrowing and ability to get consumer credit.If the interest rates on charged on loans are high, the level of consumption is low.But when the interest rates are low, the level of consumption is high.This is because most people do not limit their spending to their current income.If they don't have money, they borrow funds to buy it.

3).The wealth of households.

An increase in wealth allow households to spend more on consumption at any given level of income.Therefore an increase in wealth shifts the consumption function upwards while a decrease shifts the consumption function downwards.