Chapter17(16 in book)

# Chapter17(16 in book) - CHAPTER17 Consumption APowerPoint...

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Chapter Seventeen 1 CHAPTER 17 Consumption ® A PowerPoint Tutorial To Accompany   MACROECONOMICS, 7th. Edition N. Gregory Mankiw Tutorial written by: Mannig J. Simidian B.A. in Economics with Distinction, Duke University  M.P.A., Harvard University Kennedy School of Government M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management

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Chapter Seventeen 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.
Chapter Seventeen 3 Consumption spending by households depends on autonom ous consum ption marginal propensity to consume (MPC) disposable income C = C + c Y, C > 0, 0 < c <1 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 Y

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Chapter Seventeen 4 C Y C APC = C/Y = 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. 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.
Chapter Seventeen 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. 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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## This note was uploaded on 12/04/2011 for the course ECON 305 taught by Professor Neri during the Spring '11 term at American.

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Chapter17(16 in book) - CHAPTER17 Consumption APowerPoint...

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