Ch. 13 - Consumption & Spending Flashcards
What is consumption?
Household spending on final goods & services
(largest component of GDP)
What is a consumption function?
A curve plotting the level of consumption associated with each level of income
What is the marginal propensity to consume?
The fraction of each extra dollar of income that households spend on consumption
What is saving? What is the formula?
The proportion of income that you set aside, rather than spending on consumption
Saving = Income - Consumption
What is dissaving?
The excess amount you consume above your income in a given period that you therefore must pay for by either withdrawing money from your savings or borrowing money
What is net wealth?
The amount by which your assets exceed your debts
What is the rational rule for consumers?
Consume more today if the marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future
What is consumption smoothing?
Maintaining a steady or smooth path for your consumption spending over time
What is permanent income?
Your average lifetime income; your best estimate of your long-term average income
What is the permanent income hypothesis?
The idea that consumption is driven by permanent income rather than current income
Implications of Income Changes for Consumption:
- A temporary rise in income leads to…
- A permanent rise in income leads to…
- An anticipated rise in income leads to…
- News of a future rise in income leads to…
- Forecasting consumption…
- a small change in consumption
- a large increase in consumption
- no change in consumption
- a change in consumption
- Is hard to do
What are credit constraints?
Limits on how much you can borrow
What are 4 factors that shift the consumption function?
- Real interest rates
- Expectation
- Taxes
- Wealth
What is disposable income?
Your after-tax income
What is precautionary saving?
Saving to be prepared for a financial emergency
