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ECON 1132 (72)
Chapter 6

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Boston College
ECON 1132
Glen Peterson

Chapter 6 – Consumption and Investment Nations that save and invest more tend to have quicker growth of output, income, and wages - High saving  high investment and rapid growth Saving = income – consumption Personal saving rate – personal saving as a percent of disposable income Break-even point – at 25,000 the representative household neither saves nor dissaves, but consumes all of its income Consumption function – shows the relationship between the level of consumption expenditures and the level of disposable personal income Saving function – shows the relationship between the level of saving and income Marginal propensity to consume – the extra amount that people consume when they receive an extra dollar of disposable income - Measured graphically by looking at the slope of the consumption function Marginal propensity to save – the fraction of an extra dollar of disposable income that goes to extra saving *They are complementary to each other, if MPC is .8 then MPS must be .2 Determinants of consumption: 1. Disposable income – when DI declines in recessions, consumption usually follows 2. Per
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