Chapter 13 Flashcards
Define marginal propensity to consume.
The fraction of each extra dollar of income that households spend on consumption
What is the formula for marginal propensity of consumption?
slope = change in consumption / change in income
What is the formula for saving?
income - consumption
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 the permanent income hypothesis?
The ideas that you choose how much to consume based on your permanent income (your best estimate of your long term average income) rather than current income
What is consumption smoothing?
The idea that you should maintain a steady or smooth path for your consumption spending over time
What are three modifications to consumption choices?
- some consumers wont follow sophisticated consumption plans
- Credit constraints limit the amount that some people can borrow
- hand-to-mouth consumers spend their current income
What is the effects of a temporary rise in income?
(consumption vs hand-to-mouth)
small change + large change = intermediate change
What is the effects of a permanent rise in income?
(consumption vs hand-to-mouth)
Large change + large change = large change
What is the effects of an anticipated rise in income? (consumption vs hand-to-mouth)
no change + large change = intermediate change
What are the effects of news of a future rise in income? (consumption vs hand-to-mouth)
Large change + no change = intermediate change
What is the effects of forecasting consumption changes? (consumption vs hand-to-mouth)
Hard to forecast + forecast using income changes = difficult to forecast
What causes a movement along the consumption curve?
Change in income
What causes a shift in the consumption curve.
- real interest rates
- expectations of future income
- taxes
- wealth
