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Questions: 1. Why is consumer spending and confidence so important for businesses?

Consumer spending and confidence is important for businesses because consumer confidence refers to the degree of optimism consumers feel about the overall state of the economy and their personal financial situation and is therefore an important economic indicator. If consumer confidence is high, they will in turn spend more and make more purchases whereas if it is lower consumers will save more and purchase less. Therefore, while consumers are spending less, the economy is not running as well and the multiplier effect is less likely to take place to stimulate the economy. 2. What role does business investment into capital play in the economy and why is it so important in leading the economy towards recovery? Investment is the value of goods bought by firms for production purposes. It plays six major roles: It contributes to current demand of capital goods (increases domestic expenditure), enlarges the production base (increases production capacity), modernizes production processes (improves cost efficiency), reduces labor needs per unit of output (produces higher productivity and lower employment), allows for the production of new products (increases value added in production), and incorporates international innovations and standards (bridges the gap between advanced countries and not so advanced countries, increases international trade). 3. Is there any benefit in the economy for consumers to save and pay off their debts now? Is this a rational decision given the current economic conditions? Overall, consumers should not save in the current economic conditions, as the need to spend and stimulate the economy overrides the need to save. Due to the multiplier effect that occurs in the economy, higher consumer spending (particularly as interest rates are lower) allows for the economy as a whole to benefit, be it producers and consumers. In the long run, it is rational for households to save rather than spend, but in current economic conditions it is rational for households to spend more in order to activate the economy, particularly due to the loose monetary policies. 4. If fiscal and monetary policies along with lower taxes for corporations are not the answer, then what is? What other possibilities are available for the government to implement? A possible policy could be stimulate the economy via a stimulus program wherein job creating schemes to ‘activate’ are put in place. Another possibility would be to reduce the federal budget debt in the cause of a recession which

.opposes the Keynesian model which states that governments should deficit spend in the event of a recession.