ECON 201 Lecture Notes - Lecture 7: Consumer Spending, Consumption Function

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cerisegiraffe538

24 Sep 2015

School

University of Maryland

Department

Economics

Course

ECON 201

Professor

John Neri

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ECON 201 Full Course Notes

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Econ201-lecture 7-factors that determine the level of total spending. In the aggregate, di is the sum of the income of all individuals in the economy after all taxes have been deducted and all transfer payments have been added: di is how much consumers have available to spend and save, gross earnings taxes, national income to disposable income, government takes out taxes and adds in transfer payments, transfer payments, sums of money that the government gives certain individuals as outright grants, social security and unemployment benefits, di = gdp taxes + transfer payments, one of the main determinants of consumer spending is di. Consumer spending and income: how is consumer spending influenced buy changes in disposable income, as disposable income increases, consumer spending increases, how much does spending change: slope of consumption function, change in consumption/change in disposable income, that is called the marginal propensity to consume, by how much does spending change= vertical change/horizontal change.

Related Questions

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.

cerisewallaby167

A 'shocker' for retail spending as consumers shut wallets

Peter Martin

Published: October 6 2017 - 8:12AM
Low wage growth, higher electricity and gas bills and out-of-cycle mortgage rate increases have been

blamed for a slump in consumer spending in July and August - the worst since 2010. Retail spending slid 0.6 per cent in August after sliding 0.2 per cent in July.

Spending in cafes and restaurants and on takeaway food plunged 1.3 per cent in August to be only a little higher than it was the previous August, and lower per person after taking into account population growth.

Spending on household goods slid 1 per cent in August after sliding 2.1 per cent in July. Spending on food slipped 0.6 per cent, and spending on clothing 0.2 per cent after slipping 0.4 per cent. The only sectors where spending climbed were department stores, where spending climbed 0.7 per cent after sliding for three consecutive months, and "other retailing" where spending climbed 0.1 per cent.

"Apparently, Australians were dieting over August," said Bank of Melbourne senior economist Janu Chan. "There were sizeable declines in food retailing and cafes restaurants and takeaway. The slow pace of wage growth, rising household debt are constraining retail spending. The falling household savings ratio also suggests a limit on how much households can tap into savings for additional consumption."

Commonwealth Bank senior economist Gareth Aird was more blunt.

"The report is a shocker," he said

"We are always reticent to put too much emphasis on any one data print, but it now looks increasingly likely that strong sales growth in April and May were the anomaly in 2017. The other six months have so far been weak."

Annual sales growth was just 2.1 per cent, the slowest in four years and barely above the population growth rate of 1.6 per cent. Unusually, the weakness was present in all eight states and territories, with NSW bearing up the best in August with a drop of 0.2 per cent and Victoria and Queensland the worst with a drop of 0.8 per cent.

Commonwealth Securities chief economist Craig James said the apparent decline in spending might reflect lower prices as a result of trimmed margins. Or it might be that weighty electricity and gas bills were forcing consumers to cut discretionary and non-essential spending.

"Consumers are also still adjusting their mindset to lower wage growth," he said.
"Wages are still outpacing prices, but the slower nominal wage growth makes consumers feel poorer."

Mr James said the economists who had tipped a Reserve Bank rate rise in early 2018 might be "going back to their calculators". JP Morgan economist Ben Jarman said the retail slump increased the likelihood that the Reserve Bank would cut rates rates further before it raised them.

Mr Aird said households were devoting more of their wallets to health, education and electricity and gas.

"Consumers have a finite amount of disposable income and even with the assistance of a falling savings rate, record low wages growth has weighed significantly on the discretionary parts of retail trade," he said.

The slow growth in online retailing was helping consumers by pushing down prices but hurting retailers by depriving them of business.

Peter Martin is economics editor of The Age. Follow Peter Martin on Twitter and Facebook

This story was found at: http://www.smh.com.au/business/the-economy/a-shocker-for-retail- spending-as-consumers-shut-wallets-20171005-gyuwb3.html

a) Using the AD-AS framework, demonstrate the impacts of the change in consumer spending described in the article on output and inflation in the short-run and explain what part of the business cycle we are likely to be in. (5 marks)
b) Explain the likely impact state government expenditure on renewable energy infrastructure will have on output and inflation in the short-run, whether itâs a good time to undertake this type of policy, and what impact this will eventually have on Australian output. (5 marks)

periwinklebeaver777

1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

Answer

	a.	The aggregate demand curve will shift to the right.
	b.	The economy will always approach potential GDP.
	c.	The marginal propensity to consume will increase.
	d.	The average price level will increase.
	e.	The aggregate demand curve will shift to the left.

2. If the government wants to close a GDP gap, it can:

Answer

	a.	lower government spending on social security.
	b.	adopt contractionary fiscal policies to control inflation.
	c.	increase its budget deficit.
	d.	repay its borrowings.
	e.	raise both direct and indirect tax rates.

3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

Answer

	a.	lowering average tax rates such that aggregate supply is increased.
	b.	increasing government spending such that aggregate expenditures are increased.
	c.	increasing transfer payments such that aggregate expenditures decline.
	d.	raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.
	e.	decreasing government spending such that aggregate demand is reduced.

4. A drop in investment spending caused by increased government budget deficits is referred to as:

Answer

	a.	the multiplier effect.
	b.	crowding out.
	c.	an expansionary gap.
	d.	the paradox of thrift.
	e.	the Ricardian equivalence.

5. Discretionary fiscal policy is best defined as:

Answer

	a.	the deliberate manipulation of the money supply to expand the economy.
	b.	the deliberate change in tax laws and government spending to change equilibrium income.
	c.	the policy action taken by the Congress to reduce the federal budget deficit.
	d.	the arbitrary fluctuation in tax laws and budget requirements.
	e.	the automatic change in certain fiscal instruments when real GDP changes.

6. Which of the following can be considered as an automatic stabilizer in the economy?

Answer

	a.	Money supply
	b.	Disposable income
	c.	Real exchange rate
	d.	Real interest rate
	e.	Unemployment insurance

7. Which of the following is true about automatic stabilizers?

Answer

	a.	When income rises, automatic stabilizers increase/boost spending.
	b.	Automatic stabilizers are a part of discretionary fiscal policy.
	c.	An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.
	d.	Any kind of trade policy adopted by the government will be considered as an automatic stabilizer.
	e.	The interest rate is an example of an automatic stabilizer.

8. Increased budget deficits

Answer

	a.	can cause interest rates to increase and hence decrease net exports
	b.	have no effect on net exports
	c.	can cause interest rates to decrease and hence increase net exports
	d.	never impose additional interest costs on the government

9. The Ricadian Equivalence implies that when financing additional government expenditures

Answer

	a.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way.
	b.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way.
	c.	increasing borrowing is the best option
	d.	increasing current taxes is the best option

10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

Answer

	a.	right; decrease; increase
	b.	right; decrease; decrease
	c.	left; decrease; decrease
	d.	left; increase; increase
	e.	right; increase; increase

11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?

Answer

	a.	A decrease of $35
	b.	An increase of $105
	c.	An increase of $35
	d.	A decrease of $105
	e.	A decrease of $15

12.12. The term fiscal policy refers to

Answer

	a.	the adjustment of the GDP for inflation.
	b.	the purchase and sale of U.S. government securities to regulate the money supply.
	c.	the use of government spending and taxation to influence the level of economic growth and inflation.
	d.	the use of fines to penalize unfair business practices.
	e.	a policy action by Congress to overrule unpopular budget cuts by the president.

13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

Answer

	a.	raise the price level and leave real GDP unchanged.
	b.	raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
	c.	raise both real GDP and the price level by a multiple of the initial spending increase.
	d.	have no effect on real GDP or on the price level, because all private investment will be crowded out.
	e.	lower real GDP by an amount equal to the spending increase and reduce inflation.

14. Which of the following is not a means to finance government spending?

Answer

	a.	Government subsidies
	b.	Government debt
	c.	Capital gains taxes
	d.	Personal income taxes
	e.	Money creation

15. An automatic stabilizer is

Answer

	a.	a change in government spending aimed at achieving a policy goal.
	b.	an element of fiscal policy that automatically changes in value as real GDP changes.
	c.	an element of monetary policy that automatically changes in value as real GDP changes.
	d.	a decrease in tax rates as the economy moves into a recession.
	e.	a deliberate change in taxation aimed at increasing real GDP.

16. Budget deficits tend to grow during recessions because

Answer

	a.	real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow.
	b.	real GDP growth is positive, which reduces both tax receipts and transfer payments.
	c.	real GDP growth is negative, which reduces transfer payments in relation to tax receipts.
	d.	real GDP growth is negative, which reduces tax receipts in relation to government expenditures.
	e.	real GDP growth is positive, which increases tax receipts in relation to government expenditures.

ECON 201 Lecture Notes - Lecture 7: Consumer Spending, Consumption Function

ECON 201 Full Course Notes

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