ECON 1BB3 Chapter Notes - Chapter 9: Autonomous Consumption, Fiscal Multiplier, Consumption Function

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taupemole479

18 Jan 2019

School

McMaster University

Department

Economics

Course

ECON 1BB3

Professor

Bridget O' Shaughnessy

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ECON 1BB3 Full Course Notes

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Consumption function- relationship between consumption (household purchases of final goods and services) and income. Will shift if there is a change in net wealth, price level, interest rate, and expectations: positively related to disposable income. Marginal propensity to consume (mpc)- fraction of change in income that is spent on consumption. Investment spending- spending by firms on new capital goods, new housing, inventories: assume that there is no correlation between income and investment spending- not entirely true, but close or large technological breakthrough. Investment function will shift if there are changes in the interest rate or business expectations, Net exports- canadian goods and services sold to foreign residents minus foreign-produced goods and services bought by canadians: assume that net exports are also autonomous (for simplicity)- actually net exports fall as. Same process occurs if the spending line shifts die to a change in autonomous consumption,

Related Questions

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.

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

Consider an economy in which taxes, planned investment, government spending on goods and services, and net exports are autonomous, but consumption and planned investment change as the interest rate changes. You are given the following information concerning autonomous consumption, the marginal propensity to consume, planned investment, government purchases of goods and services, and net exports:

Ca = 1,500 - 10r c = 0.6 Ip = 2,400 - 50r G = 2,000 T = 1,800 NX = -200

a. Compute the value of the marginal propensity to save.

b. Compute the amount of autonomous planned spending, Ap, given that the interest rate equals 5.

c. Compute the equilibrium level of income, given that the interest rate equals 5.

d. Suppose that autonomous consumption changes by 4 percent of any change in household wealth and that the decline in the housing market in 2006-07 and drop in the stock market in the summer of 2007 reduces household wealth by $750 billion. Compute the decrease in autonomous consumption that results from the decline in household wealth.

e. Calculate the new amount of autonomous planned spending, Ap, and the new equilibrium level of income, given that the interest rate equals 5.

f. Using your answers to parts c-e, compute the value of the multiplier.

yellowzebra40

ECON 1BB3 Chapter Notes - Chapter 9: Autonomous Consumption, Fiscal Multiplier, Consumption Function

ECON 1BB3 Full Course Notes

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