Explain one determinant of consumption:

Interest rates are one major determinant of household consumption. The level at which interest rates are set will affect consumer decisions on borrowing and saving, and therefore consumption. If interest rates are high then the cost of borrowing is high and there is an incentive to save as there will be a high return on savings. Consumers may decide then to save a greater proportion of their money and this will lead to a reduction in consumption across the economy. On the other hand if interest rates are low, the cost of borrowing will also be low and so consumers may decide to borrow greater amounts of money to finance consumption. Instead of saving money to receive interest, consumers may instead decide to spend, thus increasing consumption.