ECN 101 Lecture Notes - Lecture 1: Consumption Function, Aggregate Demand

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redminnow421

22 Dec 2020

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One aim of macroeconomics is to explain why the real gnp fluctuates as it does. Keynesian model of income determination assumes that all prices and wages are fixed at a given level, the economy has spare resources and that there is no government, no transfer payments and no taxes. Under this model aggregate demand (ad) is given as a component of consumption demand and investment demand c and i. It is a straight line described by its intercept and its slope. Mpc is the fraction of each extra shilling of disposable income that household wish to consume. Suppose c = 8 + 0. 7y then a = 8 and b = 0. 7. Average propensity to consume (apc) is the ratio of consumption to national income (c/y) for different levels of income. It consists of firms desired or planned additions to physical capital (factories and machines) and to their inventories.

Related Questions

The average propensity to consume (APC) equals

the change in real disposable income divided by the change in consumption expenditures.

the change in consumption expenditures divided by the change in real disposable income.

real disposable income divided by consumption expenditures.

consumption expenditures divided by real disposable income.

The consumption function shows how much

households plan to consume per year at each level of real disposable income.

households plan to consume per year at each level of savings.

households plan to consume per year at each possible interest rate.

real disposable income people will earn at each income tax bracket.

Saving is

the accumulation of past periods of savings while savings is the amount of disposable income that is not consumed in a given period of time.

the amount one does not consume in a given period of time while savings is the accumulation of past periods of saving.

the difference between disposable income and spending on goods and services while savings is the difference between real GDP and disposable income.

the difference between real GDP and disposable income while savings is the difference between disposable income and consumption spending.

Thinking as an economist would, which is true of investment?

		Investment represents spending on capital goods.
		Investment is a stock concept.
		Investment is putting money into stocks and bonds.
		It is the portion of disposable income that is not used for consumption or saving.

An appreciation of the U.S. dollar ________ the price of U.S. imports, and ________ the price of U.S. exports.

		lowers, lowers
		increases, increases
		increases, lowers
		lowers, increases

QUESTION 33

Other things being equal, if input prices rise in a country, then there would be

		cost-push inflation.
		demand-pull inflation.
		cost-push deflation.
		more production and a lower price level.

mauvetortoise195

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.

Suppose the basic consumption level of Primaland is $10,000 million and that people save only 10% of their income. Government spending there is $5,000 million and the budget deficit is balanced while exports are $700 but Trade is balanced as well. The investment level is $6000 million; however, investment is independent of income and interest rate.

Aggregate Demand Z is defined as Z = C+I+G+(X-M) and the equilibrium condition is Y=Z.

The disposable income is Y_D=(Y-T).

Consumption is C=C₀+c₁Y_D and Investment is: I=I₀.

a. Set up the model for this economy.

b. Calculate and graph the equilibrium level of income for this economy.

c. What is the multiplier of this Economy?

d. What is the level of consumption at equilibrium?

e. What is the saving level if S= -C₀+0.1Y_D? What is it equal to?

Consumer confidence drops and people decide to "save" more or "consume" less by lowering their basic consumption to $8,000

f. What happens to the equilibrium Y = income and what happens to save, EXPLAIN.

azurearmadillo894

ECN 101 Lecture Notes - Lecture 1: Consumption Function, Aggregate Demand

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