What happens economically when households decrease consumption and credit card purchases?
Answer:
The households start to save more money, and if it's lots of households together and they all save their money in the bank the bank has more money to lend out.
It is hard to see what your teacher is getting at with this question. The decrease in consumption is important but whether this is accompanied by a decrease in credit card purchases seems unimportant. As you correctly point out, the bad news is that this means a decrease in aggregate demand and could result in a downturn in the economy unless the Central Bank stimulates the economy with a decline in interest rates that encourages more investment. The good news is that the public is saving more (i.e. consuming less) leaving more funds for industry to invest in expansion and growth. This could increase the rate of economic growth.
As consumption falls, savings rises. Since S(avings) = I(nvestment) the capital stock rises, giving way to new products or to less expensive consumer products. The general price level falls.
A simple example:
I can catch 3 fish a day if I work all day at it. I normally eat all three. If, however, I have spare time I can build a net so I can catch fish more easily. To build a net will take me seven days. So I reduce my consumption to 2 fish per day for fourteen days, giving me a savings of fourteen fish (or, enough to last me 7 days). I then eat the savings while I build the net. Once the net is created, I can now catch 7 fish per day. This is the way a nation's wealth is created. The savings of some become the capital stock of others, and prices in general fall. This is a good thing.
The answers post by the user, for information only, FunQA.com does not guarantee the right.
More Questions and Answers: