Question

Our consumption spending tends to rise as the stock of liquid assets in the hands of consumers and credit availability (LO6) a) rises, rises b) falls, falls c) rises, falls d) falls, rises

Short answer

The correct answer is: a) Consumption spending tends to rise, as the stock of liquid assets in the hands of consumers and credit availability rises.

Step-by-step solution

Define consumption spending, liquid assets, and credit availability

Consumption spending refers to the amount of money consumers spend on goods and services. Liquid assets are assets that can be easily and quickly converted to cash, such as stocks and bonds. Credit availability refers to the ease of obtaining credit, such as loans and credit lines, from financial institutions.

Analyze the relationship between liquid assets, credit availability, and consumption spending

When the stock of liquid assets in the hands of consumers increases, consumers will have more funds available to spend on goods and services. Moreover, when credit is readily available, consumers can borrow money to finance their consumption spending. Therefore, an increase in both liquid assets and credit availability would generally lead to an increase in consumption spending.

Evaluate the multiple choice options

Now, we will examine each of the options and determine which one best represents the relationship between liquid assets, credit availability, and consumption spending. a) Rises, rises: This option suggests that an increase in both liquid assets and credit availability would lead to an increase in consumption spending. This option aligns with our analysis in Step 2. b) Falls, falls: This option suggests that a decrease in both liquid assets and credit availability would lead to a decrease in consumption spending. While this is logically correct, our focus is on the scenario in which consumption spending rises. c) Rises, falls: This option suggests that consumption spending would increase with an increase in liquid assets, but decrease with an increase in credit availability. This is not in line with our analysis in Step 2. d) Falls, rises: This option suggests that consumption spending would decrease with a decrease in liquid assets, but increase with an increase in credit availability. This scenario is not in line with our analysis in Step 2, as we are looking for conditions leading to increased consumption spending.

Choose the correct option

Based on the analysis in the previous steps, we can conclude that: The correct answer is: a) Consumption spending tends to rise, as the stock of liquid assets in the hands of consumers and credit availability rises.

Key concepts

Liquid Assets

Liquid assets play a crucial role in determining a consumer's ability to spend. These are assets that can be quickly converted into cash without losing much value. Examples include savings, stocks, and bonds. Having a higher stock of liquid assets means that individuals have readily available funds. This enables them to easily respond to needs or desires for consumption, like shopping or dining out.

• Accessibility: Liquid assets provide easy access to cash.
• Stability: They offer a safety net during financial emergencies.

When liquid assets rise, people feel more financially secure. This often leads them to spend more freely, contributing to increased consumption spending. Therefore, an abundance of liquid assets is directly associated with the upswing of consumer spending patterns.

Credit Availability

Credit availability is another significant factor affecting consumption expenditure. It represents how easily consumers can borrow money from financial institutions, such as banks or credit companies. When credit is readily available, individuals can access extra funds that they might not have as liquid assets.

• Flexibility: Available credit provides financial flexibility for unexpected expenses.
• Investment Opportunities: Easier borrowing can also lead consumers to invest in higher-value purchases, like homes or cars.

A high degree of credit availability encourages consumers to make purchases even when they lack immediate funds. This potential borrowing power allows for an increase in consumption spending, as consumers feel more confident in obtaining finances for their needs and desires. Thus, increased credit availability generally leads directly to higher spending behavior.

Consumer Behavior

Consumer behavior is deeply influenced by both liquid assets and credit availability. Both elements together dictate how confident and willing consumers are to spend their money. When people have more liquid assets and credit is easily accessible, they tend to have a "spend today, pay later" approach.

• Spending Patterns: With more financial resources, consumers tend to spend more freely and frequently.
• Economic Impact: Increased consumption drives economic growth, raising demand for goods and services.

Understanding consumer behavior helps businesses and policymakers predict spending trends and aggregate economic activities. For instance, a consumer with both high liquid assets and credit access might buy more luxury items or invest in long-term goods, fueling different sectors of the economy. Therefore, observing these factors provides insight into larger economic movements stemming from individual and collective consumer decisions.