Households

A rise in the rate of interest rewards saving and makes borrowing dearer, so saving rises while borrowing and spending fall; a fall does the opposite. Two errors recur: writing the effect the wrong way round, and confusing a rate change with a change in tax or income — a lower rate does not cut a household's income.

Households save most when inflation is low (savings keep their real value), the rate of interest is high (saving is well rewarded), and unemployment is low (incomes are secure with a surplus to set aside). Do not reverse these — high inflation and high unemployment discourage saving, not encourage it.

When explaining why one household spends or saves more than another, finish the point. "Rich households buy more expensive things" is not enough — say why (luxuries cost more, so the same basket costs more), or why higher income raises saving (needs met, leaving a surplus). Precise, completed chains earn the mark.

The young and old tend to save little; the old often dissave (run down past savings). In retirement, income falls, which lowers both spending and the ability to save — do not assume retirees automatically save more. Middle-aged workers, with secure earnings and a surplus, save the most.

Confidence works both ways. When households feel optimistic about jobs and incomes, they spend and borrow more and save less. When they are worried, they cut spending and save more for precaution. Some candidates assume fear reduces saving — usually the opposite is true, as households build a safety buffer.