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10-23-07 - Fiscal Policy – taxes& government spending...

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American Consumption C = 1,000,000,000 + .8y Autonomous = independent of income Non-income determinants of consumption: Expectations Wealth Credit Taxes Price Levels Wealth – NOT THE SAME AS INCOME Keynes – “Two Kinds of Spending” Influenced by income Not influenced by income Consumption line never goes through the origin because people still consumer when they have no income. People increase consumption when their income increases. Average Propensity to Consumption in given period divided by total disposable . APC = C/y D APS = S/y D Recession – Increase AD Inflation – Decrease AD APS + APC = 1 AD – total spending in economy AD = C + I + G + M – X
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Consumption 70% of all spending Biggest in AD The main thing that makes individuals spend is after tax income. Disposable Income C = f (y D ) y – t = y D Savings – leakage that does not go into system
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Unformatted text preview: Fiscal Policy – taxes & government spending MPC = 1 means that everyone would spend all of their extra money It is not highly likely that MPC would equal zero MPC is in between 0 and 1. Last 40 years it has been inbetween .6 - .8 APS = 1 – MPS WRONG ON SLIDES The Keynesian Model manages demand. Exogenous – independent of disposable income. Consumption Function is a mathematical function. 1. autonomous – no matter what happens to income there is a certain amount you will spend a. Income – what you earn b. Transfer Payment – take money from someone else and spend it Y = f (x) C = f (y D ) Slope = change in y change in x y = a + bx when x = 0 spend c = a + by D AUTONOMOUS CONSUMPTION Slope = Change in C Change in Y...
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