ECON 311 Chapter Notes - Chapter 21: Real Interest Rate, Disposable And Discretionary Income, Consumption Function
Document Summary
4 main groups of decision makers: households, firms, governments, foreign purchasers of domestic products. National income amounts measure actual expenditure in each category, we look are desired. Autonomous expenditures does not depend on national income. Induced expenditure systematically changes depending on national income. No trade with other countries = closed economy. Disposable income (yd) = national income (y) Saving = all disposable income not spent on consumption. Yd can be used on consumption or saving. Consumption function relationship between desired consumption expenditure and all variables that determine it. *yd, wealth, interest rates, expectations of the future. If other factors are constant, increase in yd would lead to an increase in desired consumption. Average propensity to consume (apc) proportion of disposable income that households want to consume. Marginal propensity to consume (mpc) change in desired consumption relative to the change in disposable income. Where desired consumption (y) = disposable income (x) Reference line, break-even level (desired saving = 0)
