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21 April, 01:46

Why is Anchoring important to the field of economics and our consumer economy?

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  1. 21 April, 02:16
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    Anchoring is the tendency to be over-reliant on a single piece of information when making decisions.

    Therefore this comes into play with regards to households spending and saving. If future expectations of the economy are not great then we could see reduced consumption in the economy, as consumers increase their marginal propensity to save rather than their marginal propensity to consume.

    An example of anchoring is the media. If a tabloid has made an accusation that inflation is going to sky rocket in the next couple of months, it means that consumers will begin to save their incomes for two reasons. The first could be to take advantage off the bigger return they will receive from their savings. The second reason is borrowers may see their loan repayments increase, if they don't have a fixed rate contract (e. g. a fixed rate mortgage). Therefore they may want to save now instead and spend in order to be able to cover the higher repayments. In the consumer economy this therefore means that there will be less consumption, and for our overall economy this means reduced aggregate demand and then reduced growth in the economy.
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