Activity 3.

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If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours
Q1) Describe two factors that, according to the article, have increased consumer debt. A1) Short term loans - Because of the variable interest so if the interest rates rise the people in debt will have to pay more thus increasing consumer debt Low interest - Because in the decrease in interest for mortgage loans there were more people who had to pay for mortgage loans so in total there are more people in consumer debt Q2) What are the main problems for a household mentioned in the article that concerns high levels of debt? A2) After the global crisis banks wanted to increase consumer confidence to get more money flowing in the economy so they have decreased their interest rates when the stock market was strong, by doing this people will have more disposable money and more people loan money, later banks will take advantage of this and increase the interest rates (using the ability of variable interest rates). Korean households had debts of 143% of their disposable income compared to 87.4% just nine years earlier, so this shows that interest rates has risen steadily thus rising levels of debt. By mentioning that their disposable income to debt ratio is higher than USA (a country that spend a lot of their money on consumer goods that they want) we can clearly see the concerns of high levels of debt. The article has also mentioned that the low interest rates has caused mortgage loans to increase by 27% in the last 23 months to 281.8 trillion korean won. Q3) Suggest two ways a GVT could reduce the consumer demand for borrowing. A3) The GVT can reduce the total percentage against a property a person can borrow (e.g. reducing from 90% to 70%). The GVT could try to increase the interest rates according to hoe much they want to reduce the consumer demand for borrowing.

Q4) Describe how and why consumer spending, savings and borrowing patterns may differ between people in different situations and age groups. (Self Note: Question not properly copied (refer to the book) A4) Young, unmarried university graduate - Their spending and borrowing depend on the graduate itself as he might want something but might have low disposable income or he might have enough disposable income to buy what he needs, he might be able to save money but he might blow it off on consumer goods as he is young and may not have any concern for his future needs. Married couple with young children - High loans as their childs need are high and they might have more disposable money as they need to have enough money to start a family, high spending as their need are high and their childs wants are high, because of the high spending there will be less money to save. Retired couple receiving a pension - Low to no loans as they might not have the ability to pay back loans, they may not need loans as they will probably have low consumer wants thus they will be able to save more money Q5) Explain why if a household debts increase, consumer debt will drop and hurt economic growth. A5) If people have high debt they will have low confidence in their ability to spend thus restricting the amount spent, if people reduce buying goods and services the flow of money will drop restricting and reducing profit for firms and they will not be able to buy and sell goods. This will also affect the share market thus making value for shares drop.

By Hitesh Samraj Guhan