Households: spending, saving and borrowing Cambridge IGCSE Economics revision
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In plain words
A household can do three things with money: spend it, save it, or borrow more to spend now and repay later. What it chooses depends mainly on how much it earns, but also on interest rates, how confident it feels, the ages of its members and the habits of the society it lives in.
Added together, these choices decide how much is spent in the whole economy.
5 things to know
- Disposable income is income after direct taxes have been taken off and state benefits added.
- As income rises, households spend more in total but a smaller proportion of income, and save more. Poorer households spend most of their income, mainly on necessities.
- A higher interest rate rewards saving and makes borrowing dearer, so households save more, borrow less and spend less.
- Confident households, who expect their jobs and incomes to be safe, spend and borrow more. Worried ones save more.
- Age matters: young adults often borrow (for education or a home), the middle-aged save for retirement, and the retired spend their savings. Culture matters too: attitudes to debt and saving differ between societies.
Tips and tricks
- Total and proportion are different things. A rich household spends more money than a poor one, but a smaller share of its income.
- Link each influence to all three: spending, saving and borrowing. A full answer says what happens to each.
It lands in your notebook with its questions as flashcards.
Households: spending, saving and borrowing: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
What usually happens to the proportion of income spent as a household's income rises?
Richer households spend more in total, but a smaller share.
Interest rates fall. What are households likely to do?
Saving earns less and loans cost less.
Consumers become worried that they may lose their jobs. They are likely to
Low confidence makes people build up savings in case things go wrong.
Which age group is most likely to be spending money saved earlier in life?
In retirement, income falls and savings are drawn on.
A household earns $2000 a month and pays $300 in income tax. It receives $100 in state benefits. What is its disposable income?
2000 − 300 + 100 = $1800.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Households: spending, saving and borrowing
Cambridge IGCSE Economics 0455 · 8 marks · papermunch.org
Name ______________________________ Date ______________
Define disposable income.[2]
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Income after direct taxes have been deducted and state benefits have been added: what a household has available to spend or save.
Explain how a rise in interest rates is likely to affect household borrowing and saving.[3]
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Borrowing becomes more expensive, so households borrow less. Saving earns more interest, so they save more. Both mean less spending.
Explain why a low-income household saves a smaller proportion of its income than a high-income household.[3]
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A low-income household must spend most or all of its income on necessities such as food and housing, so little is left over to save.
Answers: Households: spending, saving and borrowing
- 1. Income after direct taxes have been deducted and state benefits have been added: what a household has available to spend or save.
- 2. Borrowing becomes more expensive, so households borrow less. Saving earns more interest, so they save more. Both mean less spending.
- 3. A low-income household must spend most or all of its income on necessities such as food and housing, so little is left over to save.