Ch 9 - Chapter 9 Aggregate Expenditure Components 1....

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Chapter 9 – Aggregate Expenditure Components 1. Consumption a. The relationship between disposable income and consumption is positive and very stable over time b. Consumption Function - the relationship between the level of income in an economy and the amount households plan to spend on consumption, ceteris paribus. i. Consumption depends on disposable income and can be said to be a function of disposable income c. Savings Function - the relationship between saving and the level of income in the economy, ceteris paribus. i. Graphed just like the consumption function ii. Also has a positive relationship with real disposable income d. Consumption and Marginal Analysis i. If income increases in the economy, then consumption and savings will too ii. The extra income received is the marginal increase in income iii. Marginal Propensity to Consume (MPC) - the portion of the increased income that is spent in consumption 1. MPC = ∆ consumption / ∆ income 2. The MPC is equal to the slope of the consumption function, even when it is not linear iv. Marginal Propensity to Save (MPS) - the portion of the increased income that is saved 1. MPS = ∆ saving / ∆ income 2. The MPS is equal to the slope of the savings function v. Changes in income are either consumed or saved vi. MPC + MPS = 1 2. Consumption Function Shifts a. Net Wealth i. Net Wealth - the value of a household's assets minus liabilities ii. Increases in wealth increase the MPC b. Price Level i. Changes in the price level effect the real purchasing power of net wealth ii. Price level increases causes the consumption function to shift downward c. Interest Rate i. Interest - the reward we get for saving our money rather than consuming, spending it on goods
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This note was uploaded on 04/29/2008 for the course ECO 2307 taught by Professor Menkin during the Spring '08 term at Baylor.

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Ch 9 - Chapter 9 Aggregate Expenditure Components 1....

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