Quiz1 GDP Flashcards
What can influence Desired Consumption Expenditure (C)?
C can be influenced by:
* Disposable Income
* Wealth
* Interest rates
* Expectations about the future
These factors affect consumer behavior and spending patterns.
How does an increase in disposable income affect consumption?
If a household’s disposable income increases, part of that increase will generally go to consumption (C) and part to saving (S).
For example, if disposable income rises from $3000 to $3500, some of the extra $500 will be spent.
Define wealth in the context of consumption.
Wealth is the value of all accumulated assets minus accumulated debts.
Examples of assets include homes and savings accounts, while debts include mortgages and car loans.
What is the effect of rising interest rates on consumption?
Higher interest rates provide more incentive to save, potentially reducing consumption (C).
How do expectations about the future influence consumption?
Optimistic expectations about the future generally increase consumption, while pessimistic expectations (e.g., fears of recession) may lead to increased saving.
What is the formula representing the relationship between disposable income, consumption, and saving?
Y_D = C + S
Here, Y_D represents disposable income, C is consumption, and S is saving.
What does the marginal propensity to consume (MPC) represent?
MPC is the fraction of a change in income that households want to spend.
It can be calculated as MPC = ΔC / ΔY.
If the MPC is 0.80, how much of a $1 increase in disposable income is spent and saved?
If MPC is 0.80, then:
* $0.80 is spent (C)
* $0.20 is saved (S).
What is the consumption function and how is it represented?
The consumption function represents consumption as a function of disposable income: C = a + bY_D.
In this equation, ‘a’ is autonomous consumption, and ‘b’ is the marginal propensity to consume.
What is autonomous consumption?
Autonomous consumption (a) is the level of consumption that does not vary with disposable income.
What is induced consumption?
Induced consumption (bY_D) varies with disposable income.
What is the average propensity to consume (APC)?
APC is the proportion of disposable income that households want to spend, calculated as APC = C / Y_D.
How does APC change with rising disposable income?
APC falls as the level of disposable income rises.
Define marginal propensity to save (MPS).
MPS is the fraction of a change in income that households want to save.
MPS can be calculated as MPS = ΔS / ΔY.
What does the average propensity to save (APS) represent?
APS is the proportion of disposable income that households want to save, calculated as APS = S / Y_D.
What is the relationship between MPC and MPS?
MPC + MPS = 1.
What does the 45° line represent in consumption analysis?
The 45° line is a reference point with a slope of 1, indicating where consumption equals income.
What happens to the saving function when the consumption function shifts upward?
The saving function must shift downward.
What factors can cause shifts in the consumption function?
Shifts can be caused by:
* Wealth
* Interest rates
* Expectations about the future.
What is the formula for aggregate expenditure (AE)?
AE = C + I
In this context, I is investment expenditure.
Define the marginal propensity to spend in the context of aggregate expenditure.
It is the fraction of any change to national income (Y) that people want to spend.
What is the slope of the aggregate expenditure function in this model?
The slope is equal to the marginal propensity to consume (MPC).
What does the consumption function look like if consumption is represented as C = 30 + 0.8Y_D?
In this function:
* 30 is autonomous consumption
* 0.8 is the marginal propensity to consume.
What determines the level of desired investment expenditure (I)?
Desired investment expenditure can be affected by:
* Level of sales
* Interest rates
* Business confidence.
