C1 is called the propensity to consume: the effect of an additional dollar of disposable income has on consumption. (ex. C1 can equal 0. 6 so for each additional dollar of disposable income 60 more cents is used for consumption. C1 is always positive and less than 1) C0 is what people would consume if their disposable income was 0. Consumption would still be positive if income was 0 because people need to eat. Either they are selling assets or borrowing to consume. Disposable income is yd = y t. Y is income t is taxes, but is equal to taxes minus transfers. Substituting the disposable income formula into the consumption formula the consumption formula becomes: c = c0 +c1 (y-t) Some variables depend on other variables in the model and are therefore explained within the model. These variables are referred to as endogenous variables. Other variables that aren"t explained, (cid:271)ut are taken as a given are (cid:272)alled exogenous.