Tutorial_CHAP16

Tutorial_CHAP16 - CHAPTER 16 Consumption A PowerPoint...

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Chapter Sixteen 1 ® CHAPTER 16 Consumption A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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Chapter Sixteen 2 The consumption function was central to Keynes’ theory of economic fluctuations presented in The General Theory in 1936. Keynes conjectured that the marginal propensity to consume the amount consumed out of an additional dollar of income is between zero and one. He claimed that the fundamental law is that out of every dollar of earned income, people will consume part of it and save the rest. Keynes also proposed the average propensity to consume, the ratio of consumption to income falls as income rises. Keynes also held that income is the primary determinant of consumption and that the interest rate does not have an important role.
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Chapter Sixteen 3 Consumption spending by households depends on autonomous consumption marginal propensity to consume (MPC) disposable income C = C + c Y, C > 0, 0 < c <1 C Y C C determines the intercept on the vertical axis. The slope of the consumption function is lower case c, the MPC. C = C + c Y
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Chapter Sixteen 4 C Y C APC = C/Y = C/Y + c 1 1 APC 1 APC 2 This consumption function exhibits three properties that Keynes conjectured. First, the marginal propensity to consume c is between zero and one. Second, the average propensity to consume falls as income rises. Third, consumption is determined by current income Y. As Y rises, C/Y falls, and so the average propensity to consume C/Y falls. Notice that the interest rate is not included in this equation as a determinant of consumption.
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Chapter Sixteen 5 To understand the marginal propensity to consume (MPC), consider a shopping scenario. A person who loves to shop probably has a large MPC, let’s say (.99). This means that for every extra dollar he or she earns after tax deductions, he or she spends $.99 of it. The MPC measures the sensitivity of the change in one variable, consumption, with respect to a change in the other variable, income.
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Chapter Sixteen 6 During World War II, on the basis of Keynes’s consumption function, economists predicted that the economy would experience what they called secular stagnation a long depression of infinite duration unless the government used fiscal policy to stimulate aggregate demand. It turned out that the end of the war did not throw the United States into an depression, but it did suggest that Keynes’s conjecture that the average propensity to consume would fall as income rose appeared not to hold.
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Tutorial_CHAP16 - CHAPTER 16 Consumption A PowerPoint...

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