Chap_14_-_Inc_and_Exp[1]

Chap_14_-_Inc_and_Exp[1] - Income and Expenditure Last...

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

View Full Document Right Arrow Icon
Income and Expenditure Last lecture we talked about business cycles, and we learned that the aggregate demand curve was integral to business cycles. And the aggregate demand curve depends on how much consumers consume, and how much businesses invest. But what determines how much consumers consume, and how much businesses invest? That is the topic of this chapter. Consumer Spending If you remember, the marginal propensity to consume (MPC) is the amount of each dollar of additional disposable income that a consumer would spend. So if the MPC = .5, and I had $100 in disposable income, we would expect that I would spend .5 x $100 = $50 of it. If I had $300 in disposable income, we would expect that I would spend .5 x $300 = $150 of it. However, even if I had no disposable income, we would expect that I would still spend some money on consumption. Maybe I would use my savings, or maybe I would borrow, but there would be certain things that I would just have to consume like food, so I’d find some money somehow from another source. This amount of money that I would spend even though I had no disposable income is called autonomous spending Therefore, we could predict how much a person would spend on consumption, by taking the amount of disposable income a person had, multiplying it by the MPC, and then adding autonomous spending. This is called the consumption function and mathematically, we can represent it like this: c = a +(MPC × yd) Where c equals the amount a person consumes, a is autonomous spending, and yd is disposable income. Therefore, if my autonomous spending was $15,000, my disposable income was $60,000, and my MPC was .5, we would expect that my consumption would be: $15,000 + (.5 x $60,000) = $45,000 or if I told you that a person’s consumption function looked like this: c = $10,000 + (.7 x yd) you would be able to tell me that their autonomous consumption was $10,000 and their MPC was .7.
Background image of page 1

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

View Full DocumentRight Arrow Icon
© K. A. Kramer, 2009 2 However, in macroeconomics we don’t look at what individual people do, we care about that the economy does in total. But when we look at the economy as a whole, we still see this sort of relationship. But because we are looking at totals, we use capital letters, not lower case letters. So for the economy as a whole the aggregate consumption function is: C = A + (MPC × YD) Here C is aggregate consumer expenditures (i.e. all the consumption spending in an economy), YD is aggregate disposable income (normally just called disposable income), and A is aggregate autonomous consumer spending – or the consumer spending that still occurs when the total disposable income in an economy has fallen to zero. We can graph the aggregate consumption function. So if the aggregate consumption function is: C = $200 + .5 x YD (in billions of 2000 dollars), it would look like this: So the aggregate autonomous consumer spending is $200 billion (2000$) and the MPC is .5. Just like so many other things in this class, the aggregate consumption function can also
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 / 9

Chap_14_-_Inc_and_Exp[1] - Income and Expenditure Last...

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