What determines your level of consumption?
•
A Deeper Look at Consumption
Determinant
An increase
leads to…
A decrease leads
to…
Correlation (+
or -)
Shift or
movement
along
Current
disposable
income (Y-T)
Increases
Decreases
+
Movement
along
Household
wealth (w)
Increases
Decreases
+
Shift
Consumption:
Notes from class
Lesson 8 Page 56
wealth (w)
Expected
future income
(Y)
Increases
Decreases
+
Shift
Price Level (P)
Decrease
Increase
-
Shift
Real interest
rate (r)
Decrease
Increase
-
Shift
Consumption function: shows relationship between consumption spending
and disposable income
•
Consumption Function:
Expectations of Future profits (animal sprits)
○
Cash flow
○
Taxes on business
○
The real interest rate
○
What determines firms' level of investment?
•
Investment:
Determinant
An increase leads to….
A decrease leads to…
Correlation (+ or -)
Shift or movement along
Expectations
of future
profits
Increase
Decrease
+
Cash flow
Increase
Decrease
+
Taxes on
business (T)
Decrease
Increase
-
The real
interest rate
(r)
Decrease
Increase
-
Price level in US relative to other countries (P
US
)
○
Growth rate in US relative to other countries (G
US
)
○
Strength of dollar relative to other countries ($)
○
What determines countries' level of Net Exports?
•
Net Exports:
Determinant
An increase leads to….
A decrease leads to…
Correlation (+ or -)
Shift or movement along
P
US
decrease
increase
-
G
decrease
Increase
-
Lesson 8 Page 57
