International Baccalaureate (IB) Practice Exam

How does the use of a credit card generally affect spending behavior compared to cash?

1. Consumers typically spend more when using credit

2. People spend less when they earn credit card rewards

3. There is no change in spending behavior

4. Spending behavior does not matter as long as you pay off the balance

The correct answer is: Consumers typically spend more when using credit

The preference for using a credit card generally leads to increased spending behavior due to several psychological and practical factors. When consumers use credit cards instead of cash, the tangible reality of spending diminishes. Cash transactions involve physically handing over money, which can create a stronger sense of loss and encourage more mindful spending. In contrast, credit card transactions are often less emotionally impactful because the exchange does not involve immediate physical cash. Additionally, the availability of credit means that consumers may feel they can spend beyond their immediate cash on hand, leading to higher overall expenditures. Credit cards can also make purchases easier, as they eliminate the need to carry cash and allow for quick transactions. Coupled with the ability to earn rewards or cashback, many consumers might justify increased spending because they perceive there's added value in using their credit card. Understanding these behavioral tendencies helps highlight the difference in spending behaviors associated with cash versus credit card use.