Households
Microeconomic Decision Makers · 1 question type
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.
Explain why saving may rise or fall (4 marks)
What comes up: "Explain two reasons why saving may decrease (or increase)" — a 4-mark question, 1 mark for identifying each reason and 1 mark for explaining it.
Write (two marks each): (1) Income may fall (1) so people have to spend a higher proportion of their income and have less left to save (1). (2) A fall in the interest rate (1) reduces the reward for saving, so people save less (1). (3) Greater confidence in the future (1) means people feel less need for a safety net, so they save less (1).
Watch out: Each reason needs a developed consequence, not just a label. "Interest rates change" earns nothing on its own; you must state the direction and link it to the reward for saving.