ECN 204 Chapter Notes - Chapter 10: Real Interest Rate, Disposable And Discretionary Income, Household Debt

• School: Ryerson University
• Department: Economics
• Course: ECN 204
• Professor: Xingfei Liu

Document Summary

Disposable income is the most important determinant of consumer spending. What is not spent is called saving. A 45-degree line represents all points where consumer spending is equal to disposable income. If actual graph of the relationship between consumption and income is below the 45- degree line, then the difference must represent the amount of income that is saved. Di minus c, also a direct relationship. Dissa(cid:448)i(cid:374)g (cid:272)a(cid:374) o(cid:272)(cid:272)ur: note that (cid:862)dissa(cid:448)i(cid:374)g(cid:863) o(cid:272)(cid:272)urs at lo(cid:449) le(cid:448)els of disposa(cid:271)le i(cid:374)(cid:272)o(cid:373)e, where consumption exceeds income and households must borrow or use up some of their wealth. An increase in wealth shifts the consumption schedule up and saving schedule down. In recent years major fluctuations in stock market values have increased the importance of this wealth effect. A (cid:862)re(cid:448)erse (cid:449)ealth effe(cid:272)t(cid:863) o(cid:272)(cid:272)urred i(cid:374) (cid:1006)(cid:1004)(cid:1004)(cid:1004) a(cid:374)d (cid:1006)(cid:1004)(cid:1004)(cid:1005), (cid:449)he(cid:374) sto(cid:272)k pri(cid:272)es fell dra(cid:373)ati(cid:272)ally. Lower debt levels shift consumption schedule up and saving schedule down.