Real interest rates a higher real interest rate

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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 after-tax (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.

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