Chapter 12 Flashcards
With respect to the economy as a whole, what is real disposable income?
Real GDP minus net taxes, or after-tax real income.
What is the definition of consumption good?
Goods purchased by households to use up such as food and movies.
What is the difference between saving and savings from an economics perspective?
Saving is a rate, savings is a value at a particular time.
What is the definition of investment from an economist’s perspective?
Investment primarily is defined to include expenditures on new machines and buildings– capital goods–that are expected to yield a future stream of income.
What is a capital good?
Non-consumable goods that firms use to make other consumables or products.
What is the difference between fixed investment and inventory investment?
Fixed investment involves the purchasing of capital goods while inventory investment includes purchases of goods to stock inventories of firms.
According to the classical model, what was the key determinant of saving?
The interest rate.
Extra Notes: Specifically, the higher the interest the more people wanted to save and consequently, the less people wanted to consume.
According to Keynes what is the most important determinant of an individual’s real saving and consumption decisions?
The flow of income.
Briefly describe the lifecycle theory of consumption.
A theory in which a person bases decisions about current consumption and saving on both current income and anticipated future income.
Under the lifecycle theory of consumption, if an individual is slated to receive more income what will be their predicted actions in terms of saving and consumption?
Save less, consume more.
Extra Notes: If a person expects a higher income the individual will tend to consume more and save less in the same span of time.
What is the permanent income hypothesis?
A theory of consumption in which an individual determines current consumption based on anticipated average lifetime income.
According to the permanent income hypothesis, if a person’s income temporarily changes what will be their predicted actions?
The person responds by saving the extra income and leaving their consumption unchanged.
What is the consumption function?
The relationship between the amount consumed and disposable income.
Note: a consumption function tells us how much people plan to consume at various levels of disposable income.
What is “Dissaving?”
A situation in which spending exceeds income.
Mathematically the saving function is the ____ of the consumption function.
Compliment
