Households
Microeconomic Decision Makers
The rate of interest is the reward for and the cost of , so it pulls households' decisions in opposite directions.
- A higher interest rate raises the reward for saving (savings earn more), so households tend to save more and borrow less (loans and mortgages cost more). Spending falls.
- A lower interest rate reduces the reward for saving and cuts the cost of borrowing, so households tend to save less, borrow more and spend more.
Common exam question
What moves household saving, borrowing and spending
Question: Choose how a rise or cut in the interest rate changes saving and the cost of borrowing, or which change makes households save more or spend less (1 mark, multiple choice).
Set in 4 of the 13 multiple-choice papers. The grid offers every pairing of "increased" and "decreased", and both columns follow the rate. A rise makes saving more rewarding, so more is saved, and makes loans dearer; a cut lowers both. The column is the cost of borrowing, which moves with the rate, not the amount borrowed, which moves against it.
To encourage saving, the key is a higher interest rate; a higher income tax rate would leave less to save. A fall in disposable income is the keyed cause of lower household spending, while lower interest rates, sales tax or savings would each raise it. In a table of conditions, the keyed row pairs a high interest rate with low inflation.