Question

8. What factors influence the spending behavior of the different sectors of the economy?

Answer 1

Factors affecting the spending behavior of different sectors of the economy are as follows:

Consumer Spending :

• Interest rate - Higher interest rate may lead to lower disposable income in hand to spend and therefore lower consumer spending
• Wage Rate - Higher wages will add more purchasing power to consumers and will enable them to buy more and more goods.
• Inflation - Rise in price levels of goods may lessen the effect of nominal wage rate of consumers if former is more than latter and will end up with lower consumer spending
• Tax rate - A cut in tax rate will boost up the incentive to spend more and hence spending will go up.

Investment Spending :

• Interest Rate - Higher interest rate may reduce the incentive for companies to invest and hence reduce the spending by investors.
• Economic Growth - Higher growth rates in economy induces investors to spend more on capital projects.
• Inflation - Higher inflation rates may result into situation of uncertainty and downturn making it difficult for investors to invest.
• Wage Costs - Higher wage cost may result in higher costs of production for firms and lesser motivation to invest.