RES-ECON 162 Lecture Notes - Lecture 3: Consumer Confidence Index, Gross Domestic Product, Temporary Assistance For Needy Families

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18 Apr 2016

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Consumption expenditure is based largely on the level of disposable income. *relationship between consumption expenditure and income is consumption function or propensity to consume* Difference between income and consumption is saving (or dissaving) Average propensity to consume (apc) ratio of consumption to income. Average propensity to save (aps) ratio of saving to income. % of each additional dollar of disposable income that will be. Fraction of each additional dollar of income that does not go into consumption will go. Transitory, short term changes in income have little effect on consumer spending. *consumers make consumption choices based upon longer term income. Permanent income hypothesis expectations not current income* behavior tax rebate assets including both physical (shares bonds, property) and human (education & experience) average propensity to consume. Low income earners have a higher propensity to consume. High income earners have a higher transitory element to their income and a lower than.

Related Questions

(Answer the following questions based on the given data.)

**Please show work/formulas**

Consumption and Savings Schedule

Complete the following schedule (savings, APC, APS, MPC, & MPS):

DI	C	S	APC	APS	MPC	MPS
240	244
260	260
280	276
300	292
320	308
340	324

Key: DI = Disposable Income, C=Consumption, S=Saving, APC = Average Propensity to Consume, APS=Average Propensity to Save

MPC=Marginal Propensity to Consume, MPS=Marginal Propensity to Save

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What is the current level of total public debt for the United States, and what percent is foreign-owned?

The following table is a consumption schedule. Assume taxes and transfer payments are zero and that all saving is personal saving.

(GDP = DI)	C	S	APC	APS
$1,500	$1,540	$_____	1.027	–0.027
$1,600	$1,620	_____	1.013	–0.013
$1,700	$1,700	_____	_____	_____
$1,800	$1,780	_____	0.989	0.011
$1,900	$1,860	_____	0.979	0.021
$2,000	$1,940	_____	_____	_____
$2,100	$2,020	_____	0.962	0.038
$2,200	$2,100	_____	_____	_____

Compute saving at each of the eight levels of disposable income and the missing average propensities to consume and to save.

1. The break-even level of disposable income is $________.

2. As disposable income rises, the marginal propensity to consume remains constant. Between each two GDPs the MPC can be found by dividing $________ by $________, and is equal to _______.

3. The marginal propensity to save also remains constant when the GDP rises. Between each two GDPs the MPS is equal to $________ divided by $________, or to _______.

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Specific assignment: Mark each statement either True or False. If a statement is false, explain (very briefly) why it is false.

Keynes hypothesized that consumption is positively related to income. True

The marginal propensity to consume, MPC, is measured as changes in consumption over changes in income. True

The MPC is merely the percent of oneâs income that is spent to purchase goods and services. True

The MPC is the slope of the consumption function.

If the MPC is .8, then it may be concluded that the MPS must be .2.

If a personâs income is $10,000 and that person is spending $7,500 on consumption, then it may be concluded that that person has a marginal propensity to save of .25.

The MPC and the MPS must sum to one, meaning that 1 â MPC = MPS

Given a linear (straight-line) consumption function, the MPC must be a constant.

At the point graphically at which the consumption function intersects the 45-degree reference line, the MPC must be equal to 1.

If the consumption function lies above the 45-degree reference line, then there must be negative saving in the economy.

Autonomous consumption is that level of consumption spending that is independent of the level of income.

A change in the level of income will shift the consumption function either upward or downward.

A change in the level of consumer wealth will shift the consumption function either upward or downward.

If the MPC has a positive value, then the MPS must have a negative value.

Saving is defined simply as disposable income minus consumption.

If the consumption function has a slope of 4/5, then the saving function must have a slope of .2.

Any factor that would shift the consumption function upward would shift the saving function upward also.

The average propensity to consume (APC), like the MPC, is simply the slope of the basic, Keynesian consumption function.

Given a typical shaped consumption function, as the level of income rises, the APC rises as well.

If a consumption function graphically starts at a point above the origin (i.e., has a positive vertical axis intercept), then the saving function must begin below the origin.

A dramatic rise in household inflationary expectations could be expected to shift the consumption function downward and the saving function upward.

RES-ECON 162 Lecture Notes - Lecture 3: Consumer Confidence Index, Gross Domestic Product, Temporary Assistance For Needy Families

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