15 CONSUMPTION FUNCTION

15 CONSUMPTION FUNCTION - SECTION 15: THE CONSUMPTION...

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SECTION 15: THE CONSUMPTION FUNCTION THE CONSUMPTION FUNCTION Three things to do with income (Y) 1. Spend it (Consumption = C) 2. Save it (Saving = S) 3. Pay taxes (Taxes = T) Y = C + S + T DISPOSABLE INCOME: Y d = Income available after paying taxes Y d = Y - T = C + S There are only two things to do with disposable income 1. Spend it (consumption = C) 2. Save it (saving = S) Y d = C + S
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CONSUMPTION FUNCTION Expresses consumption spending as a function of disposable income Holding all other variables constant Other variables also influence the level of consumption Wealth Expected future income Expected inflation rates Level of interest rates WEALTH VERSUS INCOME WEALTH (OR NET WORTH): Value of what you own minus what you owe INCOME: Amount you earn in a given time period Wealth is what you have saved over your lifetime An old person could be extremely wealthy and have almost no income
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CONSUMPTION FUNCTION FOR A HOUSEHOLD Consumption spending increases as income increases C = f(Y) Or C = f(Yd) The relationship between consumption and income is close to linear Slope of function decreases as income increases.
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Consumption spending (C) increases as GDP increases. C = f(GDP) = f(Y) Or C = f(Y d ) where aggregate income (Y) = GDP CONSUMPTION FUNCTION FOR THE U.S. ECONOMY Historically, the relationship has been almost exactly linear. Frequently, we express C as a function of Y, rather than Y
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This note was uploaded on 04/07/2008 for the course ECON 0110 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.

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15 CONSUMPTION FUNCTION - SECTION 15: THE CONSUMPTION...

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