Analyse the causes of a reduction in borrowing by households
Answers
Answer:
Households have been saving a significantly larger proportion of their disposable incomes in recent years than in the previous two decades. This turnaround in saving has been accompanied by a moderation in the household sector's borrowing behaviour, which has seen the household sector's gearing ratio stabilise after two decades of increases.
These changes seemed to intensify following the onset of the global financial crisis (GFC), with households reducing their accumulation of debt and re-allocating their savings towards lower risk assets such as deposits.
These developments have a range of implications for the Australian economy.
- Higher household saving — and lower household spending — in the context of Australia's mining boom means that record levels of business investment can be accommodated with less reliance on overseas sources of funds than would otherwise be the case. By reducing aggregate demand, higher rates of saving and lower household spending may also reduce pressure on prices and wages and therefore interest rates, while more moderate rates of gearing will reduce households' exposure to negative economic shocks.
Answer:
Borrowing occurs when an individual firm or the government takes out a loan, paying it back to the financial lender over a period of time with interest payments. There are several reasons which cause a decrease in borrowing. Households save a large portion of money whenever they are able to do so, if there is a higher household savings with minimal spending of money then the households will not require borrowing. If the interest rates in the economy are high, then people will borrow as they will not be able to pay it back, hence decreasing borrowing. If banks and other financial institution don't have a specific amount of money, which is the cash reserve ratio set by the central bank, then there will be less money available for lending; automatically causing a reduction on borrowing. Another factor is the confidence level. If an economy has a prosperous outcome after borrowing, the confidence level is high, however if the outcome of the project is negative, the confidence level decreases, discouraging people to borrow money. Furthermore, the income of a person is also dependent on borrowing. If a person has a large sum of wealth, they will tend to borrow less compared to the individual with a lower income. On the other hand, people with less income have a greater risk of defaulting on the loan, which means that the central bank will not allow to lend them money, as a result causing a reduction in borrowing.
Explanation:
Factors that influence on the borrowing of households in the economy are the level of disposable income, interest rates, confidence levels, the availability of funds (money supply), credit (including store cards) and wealth.
I answered this as a 6 marks question, which is why not all factors are described.
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