chapte10 - Chapter 10 I. Consumption Function (CF) A. With...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 10 I. Consumption Function (CF) A. With Y (GDP) on the horizontal axis, and C (Consumption Spending) on the vertical, the curve representing the relationship between the level of spending at various income levels is called the Consumption Function. For comparison, a line is also drawn at a 45 degree angle, starting at the origin. This line shows a 1:1 ratio of Consumption: Income, which only actually exists when the Consumption Function crosses the 45 degree line. At points to the left of this intersection, Consumption exceeds income (through borrowing). This region is called “dissavings” where the savings are a negative number. To the right of the intersection, income exceeds consumption spending. Graphically this is due to the slope of the CF being less than 45 degrees; the ratio of C/Y is less than 1:1. If it is 0.8/1 that means people spend 80 cents for every dollar of increased income. B. Change in output consumed, represented by movement along the CF, can only be caused by a change in Y (income). CF can shift (up or down) dependent on: 1. Attitudes towards saving – influenced by religious and cultural customs, as well as concrete factors like the existence of pensions and insurance. 2. Assets – while income is measured on a yearly basis, assets are the accumulated, year after year, total worth of individuals. It often includes the inherited assets of previous generations as well. Assets take three forms: i. Liquid assets: money or close to money, such as bonds and savings accounts that can be quickly turned into cash. ii. Debt: accumulating debt enables C to increase (CF shifts up) while paying down debt causes CF to shift down. The interest rate and leniency or rigidity of the terms of lending also will influence the CF. iii. Ownership of durable goods: if individuals purchase a variety of durable goods, their CF can shift down because they will not need to spend at that level again for some time.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
3. Expectations, particularly about future income, the health of the economy, and the security of their employment 4.Taxes- directly influence C, therefore CF shifts if taxes fluctuate. 5.Distribution of income – if income is distributed away from the rich and towards the poor, overall spending will increase (CF shifts up) since the wealthier individuals are able to save more while the poor are more inclined to spend additional income. 6.Demographics – the makeup of society in terms of age, number of people in the population, and the percentage of the population in the workforce will all influence the CF. Factors like taxes, assets, distribution of income or demographics are called “objective” or economic factors while attitudes towards savings and expectations are “psychological” factors. In addition to the CF, a Savings Function can be drawn which simply
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 8

chapte10 - Chapter 10 I. Consumption Function (CF) A. With...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online