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Unformatted text preview: Real interest rates: A higher real interest rate increases the costs of
consumption, households save more and consume less.
Future prices: Higher future inﬂation will encourage more spending
today.
Consumer conﬁdence: If the consumers are more conﬁdent about the
economy they will spend Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 12 / 43 PAE Consumption Consumption Function
Will be a linear line that expresses the relationship between aftertax
(or disposable) income and consumption:
C = C + MPC (Y − T ), (2) The ﬁrst term, C is called autonomous consumption. Autonomous
consumption is the level of income that is not related to changes in
disposable income.
The second term, MPC (Y − T ), tells us how much of our disposable
income (Y − T ) we spend.
The marginal propensity to consume or (MPC) is the slope of the
consumption function. It tells us how much consumption changes for
a given change in (Y − T ). It is the amount by which consumption
rises when disposable incomes rises by $1 (0 < MPC < 1).
Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 13 / 43 PAE Consumption Consumption Function (Figure 10.1)
An upward sloping line with an intercept of C and slope of MPC . Figure : Consumption Function: Slope is the MPC and intecept is C
Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 14 / 43 PAE Consumption Consumption Function (Figure 10.2)
An increase in wealth (housing bubble) will shift the consumption
function upward. Figure : Consumption Function  An Increase in Wealth
Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 15 / 43 PAE Consumption Saving
We can also use the consumption function to derive saving. Recall
household saving equal income less consumption less taxes and
transfer payments:
S =Y −C −T
(3)
We know C = C + MPC (Y...
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This document was uploaded on 03/18/2014 for the course ECON 202 at Gonzaga.
 Spring '09
 LYONS
 Macroeconomics

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