consumption function Flashcards

1
Q

what is the equation that shows the connection between AE, O and Y?

A

O=Y=AE

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2
Q

what is the consumption function model based upon?

A

the relationship between the level of disposable income received by households and the level of consumption and savings

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3
Q

what is the equation for the simple consumption function?

A

Y=C+S

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4
Q

what does the 45 degree line represent?

A

it shows all points where planned expenditure is equal to planned income.

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5
Q

why is the 45 degree line drawn?

A

to show all the points of equilibrum, along this line output is always equal to expenditure

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6
Q

what does equilibrum mean?

A

the level of income, output and spending in the economy is in balance

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7
Q

what does the break even amount mean?

A

where all income is spent on consumption and nothing is saved

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8
Q

when is savings positive?

A

at higher levels of income because C is less than the income

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9
Q

when is savings negative?

A

at lower levels of income when C exceeds income

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10
Q

what is the general formula?

A

c=a+bY

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11
Q

what does a stand for?

A

autonomous consumption (when Y=0)

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12
Q

what does b stand for?

A

MPC

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13
Q

what is the MPC?

A

marginal propensity to consume - the fraction of any change in income that is spent on consumption

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14
Q

how is MPC calculated?

A

change in C / change in Y

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15
Q

how is MPS calculated?

A

it is whatever is not consumed

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16
Q

what is the savings function equation?

A

S=a+(1-b)Y

17
Q

what does a stand for in the savings function?

A

the amount of savings required to be spent to fund consumption when Y=)

18
Q

what does (1-b) stand for?

A

1-MPC or MPS and is the slope of the SF

19
Q

what is dissaving?

A

when Y is not great enough to fund C you are spending your savings

20
Q

when will S cross the x axis?

A

when C=Y at the break even point when C intersects the 45 degree line

21
Q

what is the APC?

A

the overall proportion of Y that has been consumed at a particular level of Y

22
Q

what is the APC equation?

23
Q

why does the APC fall as income rises?

A

because as Y rises autonomous consumption represents a smaller and smaller proportion of your Y

24
Q

what is APS?

A

the overall proportion of Y that has been saved at a particular level of Y

25
what is the APS equation?
APS=S/Y
26
why does APS rise when Y rises?
savings begins to represent a larger proportion of Y
27
what are the assumptions when the financial sector is added?
- levels of investment are constant across all levels of Y - the level of AE must now be equal to consumption plus investment so AE=C+I - C rises by the level of I - equilibrum occurs where S and I intersect
28
what is the equilibrum level of income called?
Ye
29
what happens if the level of income is either above or below the equilibrum level?
planned spending will not equal output and firms inventories will change, signalling them to either increase or decrease production. the economy will move towards equilibrum
30
when income is greater then equilibrum and output is greater then aggregate expenditure how will the economy move to equilibrum?
- firms experience a surplus - inventories rise - firms cut production and employment - output falls, income falls, expenditure falls - continue until Ye
31
when income is below equilibrum, investment exceeds savings and expenditure is greater than output how will the economy move towards Ye?
- shortage of goods - inventories fall - firms increase production and employment - output and income rise - continue until Ye