ECON 1110 Lecture Notes - Lecture 6: Autonomous Consumption, Consumption Function, Interest Rate
2 Feb 2016
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Document Summary
Proportion of disposable income households want to consume. Proportion of disposable income households want to save. Yd / yd = c + s / yd. 1 = c / yd + s / yd. If yd = 0 then c = c0. We know that mpc = b = 0. 75. Increase in wealth and decrease in interest rates = optimistic: increase in autonomous consumption, consumption function shifts upwards, saving function shifts downwards. Categories of investment: inventory accumulation, residential construction, new plant and equipment. Determinants of investment expenditure: interest rate. Increase in interest rate = increase in opportunity cost of doing investment = reduction in desired investment: changes in the level of sales. Increase in sales = increase in desired stock of inventories = increase in desired investments: business confidence. Increase in business confidence = investors become optimistic = increase in desired investments. For now, we will assume that desired investment is autonomous: investment expenditures are held constant.
