BU127 Chapter Notes - Chapter 21: Autonomous Consumption
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We start with a very simple model. People buy goods for all disposable income, yd. All disposable income is spent on consumption or saved. C = a + b * yd. Changes in wealth, interest rates, or expectations about the future shifts the function. Rotation = change in marginal propensity to consume. Low interest rates/business optimism will increase residential and plant/equipment investment. Ae = (a + io) + b * yd. Savings equilibrium is found by subbing the value for y into c = a + b (yd) and subbing the same y into io = a and calculating the difference between them. For this chapter savings = investment (io) Parallel shift in ae will lead to increased income. How much, depends on slope of ae. Slope of ae is the marginal propensity to spend (mps) Start with ae = a + zy. If a increases, y increases by: 1___ (1-z)
