The Consumption Function

Question 1

what is the formula for income

Answer 1

Y =C + S

Question 2

what is the ‘consumption function’

1. explanantion
2. formula

Answer 2

rate at which consumption changes when income rises plus the level of consumption when consumer has no income
C = bY + a

Question 3

in the consumption function formula what does the a and b variable symbolise

Answer 3

a - autonomous consumption: when there is no income, the level of spending that is occuring (Drawing on savings)
b - rate at which consumption (over savings) changes when income rises

Question 4

what is the MPC and formula

Answer 4

fraction of any change in income that is spent on consumption
MPC = changes in consumption/change in income

Question 5

what does a higher MPC mean for the Consumption Function

Answer 5

the higher MPC, the steeper the consumption function as more is spent on consumption

Question 6

what is MPS

1. formula
2. relationship to MPC (formula)

Answer 6

fraction of any change in income that is saved
MPS = change in savings/ change in income
MPS + MPC = 1

Question 7

what is the absolute propensity to consume

Answer 7

proportion of total income spent on consumption

as income rises, APC falls

Question 8

what is the absolute propensity to save

Answer 8

proportion of total income saved

as income rises, APS rises

Question 9

what is the formula relating APS and APC

Answer 9

APS + APC = 1