Edev Flashcards
What does MPC stand for?
Marginal Propensity to Consume
The MPC quantifies the proportion of each additional dollar of household income used for consumption expenditures.
What is the formula for calculating Marginal Propensity to Consume (MPC)?
MPC = change in consumption / change in income
This formula quantifies induced consumption and measures the slope of the consumption line.
What is the difference between Average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC)?
APC is the ratio of total consumption to total income, while MPC is the change in consumption due to a change in income.
APC expresses overall spending as a fraction of total income, whereas MPC focuses on spending from each additional dollar.
What is the relationship between Average Propensity to Save (APS) and Average Propensity to Consume (APC)?
APS is the inverse of APC; their sum equals one.
A household must either save or spend all its disposable income.
What does a high average consumer expenditure indicate for the economy?
It suggests strong household spending, which drives demand for goods and services, supporting business profitability and employment.
Conversely, a low average propensity to consume can harm the economy.
What effect do expectations of rising prices have on consumption and saving?
They increase consumption and decrease saving.
This shifts the consumption schedule upward and savings downward.
How do taxes influence consumption and saving behaviors?
Higher taxes reduce consumption and saving, while tax reductions encourage more spending and saving.
Taxes are paid at the expense of both consumption and savings.
What is the impact of increased household debt on consumption?
Increased borrowing raises current consumption, moving the consumption schedule up.
Conversely, decreased borrowing leads to reduced consumption.
According to Keynes, what happens to the Average Propensity to Consume (APC) as income increases?
APC falls as income increases.
This reflects the tendency of individuals to consume less proportionally as their income rises.
What is the consumption schedule?
It defines the relationship between income and consumption, showing how disposable income affects purchasing behavior.
As disposable income rises, consumption of goods typically increases.
What is the economic significance of the marginal propensity to save (MPS)?
MPS indicates the fraction of an increase in income that is saved rather than consumed.
MPS is crucial for understanding consumer behavior and its impact on the economy.
Fill in the blank: The sum of the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS) equals _______.
1
What does the term ‘propensity’ refer to in economics?
A natural tendency to behave or do things in a certain way, such as spending or saving.
Propensity can apply to various economic behaviors, including investing and importing.
True or False: The average propensity to consume is total consumption divided by total income.
True
What is the significance of household-related spending in the economy?
It plays a significant role in sustaining economic activity and employment.
High household spending creates demand, which is essential for business profitability.
What is the equation for savings in relation to disposable income and consumption?
Savings (S) = Disposable Income (DI) - Consumption (C)
This equation reflects the aggregate savings behavior of households.
What happens to consumer behavior during a recession according to the text?
Consumer behavior shifts towards increased saving and reduced spending.
Expectations of lower income lead to decreased consumption.
