Disposable Income Determines Household Spending

Steps:

• Identify factors affecting household consumption in macroeconomics.
• Recall the consumption function: spending rises with disposable income.
• Evaluate each option's impact on disposable income or incentives to spend.
• Select the option that directly reduces spending power.

Why A is correct:

• Disposable income is after-tax earnings available for spending or saving; a reduction lowers funds for consumption, per the Keynesian consumption function C = a + bYd, where Yd is disposable income.

Why the others are wrong:

• B: Lower interest rates reduce borrowing costs, encouraging more spending on big-ticket items.
• C: Reduced sales tax lowers prices, boosting purchasing power and spending.
• D: Lower savings implies more income allocated to spending, increasing consumption.

Final answer: A