Interest rates play a crucial role in influencing household borrowing and saving decisions, and the impact varies across age groups. Higher interest rates generally discourage borrowing and encourage saving, while lower interest rates have the opposite effect.

Young Adults: Higher interest rates make borrowing more expensive, potentially discouraging taking out loans for cars or mortgages. This might lead them to save more to avoid debt. Conversely, lower interest rates encourage borrowing, making it more affordable to finance major purchases.

Middle Age: Interest rates significantly affect mortgage repayments. Rising interest rates increase monthly mortgage payments, potentially impacting affordability and delaying homeownership. Lower rates make refinancing mortgages more attractive and can free up cash flow for other savings or investments.

Retirement: Retirees often rely on interest income from savings and pensions. Higher interest rates increase their income from these sources, improving their financial security. Lower rates reduce their income, potentially requiring them to draw down more from their savings.

Example: Consider a young adult saving for a house. If interest rates are high (e.g., 5%), they might save a larger portion of their income to reach their goal. If interest rates are low (e.g., 1%), they might be more inclined to borrow to buy a house, as the cost of borrowing is lower.

The age of household members significantly impacts their financial decisions. Life-cycle stages – young adulthood, middle age, and retirement – each present distinct spending, saving, and borrowing priorities.

Young Adults (18-30): Typically characterized by higher spending on discretionary items like entertainment, travel, and housing (often renting). Savings may be low or even negative due to student loan debt and establishing careers. Borrowing is common, often for cars, mortgages, or personal loans. Financial priorities include building credit and establishing a financial foundation.

Middle Age (31-55): This stage often involves a shift towards saving for the future – retirement, children's education, and property ownership. Spending may be focused on family needs (housing, education, healthcare). Borrowing might be used for mortgages, education loans, or home improvements. Financial priorities include balancing present consumption with future security and managing family expenses.

Retirement (56+): Spending patterns shift to managing a fixed income, often drawing from savings and pensions. Savings may be used to supplement income or cover healthcare costs. Borrowing may occur to finance healthcare, travel, or other lifestyle expenses. Financial priorities are focused on maintaining a comfortable lifestyle within a limited income and ensuring financial security in old age.

Summary Table:

(a) A decrease in consumer confidence leads to a reduction in household spending. Since household spending is a significant component of aggregate demand, a decline in spending can reduce overall demand in the economy. This decrease in demand can lead to businesses reducing production, which in turn can result in job losses. Increased unemployment further reduces incomes and confidence, creating a negative feedback loop. This decline in economic activity – reduced production, job losses, and lower incomes – is characteristic of a recession.

(b) Two measures a government could take to prevent a recession caused by a fall in consumer confidence are:

• Increase Government Spending: The government could increase spending on public works projects (e.g., infrastructure, education) to create jobs and boost demand. This directly counteracts the decline in consumer spending.
• Lower Interest Rates: The central bank (often independent of the government) could lower interest rates to make borrowing cheaper for businesses and households. This encourages investment and spending, helping to stimulate economic activity.