Cambridge IGCSE and O Level Economics

Chapter 17: Households

Suggested answers to individual and group activities
Group activities
1 C, A and B. The rich spend more (in percentage terms) on consumer durables and leisure goods
and services, while the poor spend a higher proportion on food and clothing.

Individual activities
1 a A
 negative savings ratio means that people in South Africa were spending more than their
income by borrowing from others.
b 90.2% i.e. 100% − 9.8%.
c Chile has a higher savings ratio than Bangladesh, which suggests that income is higher in
Chile.
d The Indian savings ratio may be higher than that in Pakistan because the disposable income
levels may be higher, the interest rate may be higher, the tax treatment of savings may be
more favourable, a greater range of good quality financial institutions may be available and
social attitudes may be more favourable to saving.
2 a
Income ($) Consumption ($) Saving ($)
100 100 0
200 180 20 1
300 240 60
400 280 120
500 300 200

b i 100% ($100/$100)
ii 60% ($240/$300)
3 a The savings ratio is the proportion of disposable income saved.
b Retired people draw on their savings to maintain their living standards while workers tend to
build up their savings.

Suggested answers to multiple choice questions and

four-part question
Multiple choice questions
1 B
A rise in the rate of interest increases the returns on savings. So people save more and
consequently spend less.
2 A
People spend more when they are confident. They will expect things to improve, including their
disposable income and hence their ability to spend. B would reduce disposable income and as
a result expenditure. C would mean that people’s ability to spend is reduced. D would mean that
income would transfer from the poor, who spend a higher proportion of their income to the rich,
who spend a lower proportion of their income.

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Cambridge IGCSE and O Level Economics

3 B
A, C and D would all tend to encourage saving. A lower rate of interest would reduce the money
earned from saving.
4 D
Disposable income minus consumption equals saving. Borrowing enables people to spend
more than their income. Income levels could be rising or falling and there may or may not be a
redistribution of income.

Four-part question
a The opportunity cost of saving is spending now. A decision to save, for example, $20 dollars
means that $20 cannot be spent now.
b Young workers may save less than the middle-aged workers because they may earn less. Wages
tend to rise as workers approach middle-age. Having more income increases people’s ability to
save, they can afford to purchase the products needed for a reasonable standard of living and
have income left to save.
Young workers may be less concerned to save for their old age as it may seem a long way off. In
contrast, middle-aged workers may be concerned to build up a good pension.
c Households may borrow less if there is an increase in the rate of interest. A higher interest rate
will raise the cost of the loan, making it less affordable. It may also make banks more reluctant to
lend to some people as there may be greater concern about their ability to repay it.
A reduction in confidence in their future economic prospects may also make people less willing
to borrow. If they think there is a risk that they may lose their jobs in the future or experience a cut
in their wages, they may be concerned that they would not be able to repay any loan taken out,
for instance, to buy a better home.
2
There may also be changes in the attitude to borrowing. For instance, past experience of running
into difficulties repaying loans may make households less willing to take out future loans.
d An increase in income usually increases the total amount that people spend. As people’s
disposable income rises, they are able to afford to purchase more goods and services. Having
more goods and services usually increases people’s living standards.
Higher income also tends to be associated with greater wealth. As people get richer, they can
afford to buy more consumer durables and acquire assets such as houses and shares. Having
more wealth can give people greater confidence, which can increase their willingness to spend. It
also increases banks’ willingness to lend to them and so increases their spending capacity.
An increase in income does not, however, necessarily mean an increase in disposable income. If
the amount of income tax increases in proportion with gross income, people’s spending power
may be unchanged.
An increase in income may be associated with an increase in the total amount spent but a fall in
the proportion of disposable income spent. When people are poor, they have to spend all of their
income just to survive. As people get richer, they enjoy a good material standard of living with,
for instance, high-quality clothes and housing, but may still be able to save a proportion of their
income.
There may be other changes happening in the economy that may have more of an impact, at any
one time, than an increase in income. An increase in income may be accompanied by a fall in
spending if, for instance, there is a rise in the rate of interest or financial institutions are offering
more and better quality saving schemes. There may also be a change in the age distribution of
the population. A higher proportion of older people may, for instance, reduce spending.

© Cambridge University Press 2018