ECON 20 Lecture Notes - Lecture 14: Business Cycle
Document Summary
Consumption and income: psychological law: consumption spending rises with income. In his classic book, the general theory, keynes described what he called a. Fundamental psychological law: the more income people have, the more they will consume. This law may seem fairly obvious, but it is not necessary for people to consume more just because they make more money. People could live in a way where they just meet their needs and save all remaining income. However, this is not the usually the case; when people make more money, they tend to spend more. Equivalently, when peoples" incomes fall, they will consume less. We can see evidence of this law at work in recessions and booms. Usually, consumption declines (or at least its growth slows substantially) in recessions, while consumption usually grows fast in economic booms with rising income: marginal propensity to consume (mpc) The mpc for an economy is usually assumed to be between 0 and 1.
