10. Consumption Function 10. CONSUMPTION FUNCTION. 10. Consumption Function. 10. Consumption Function. Definitions. Consumption
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1 10. Function 3 Definitions 1. /Net Income: Y D = Y G T = C+ S 2. Function Expresses consumption as a function of. 10. CONSUMPTION FUNCTION Torsten Jochem 10. Function 10. Function 2 4 Gross (Y) can be either consumed (C), saved/ invested (S), or given to the government in taxes (T) The individual Function Y = C + S + T C = Y S T No difference to what we did before in GDP chapter! GDP computation by expenditure approach: Y = GDP = C + I + G The more you have the more you can save.
2 10. Function 10. Function 5 7 The individual Function The individual Function C=DI The more you have the more you can save. - Increase in Wealth (= assets liabilities) - Lower interest rates /returns to investment -Expectations, e.g. * higher future * higher future inflation dissaving Break-even saving 10. Function 10. Function 6 8 The individual Function The individual Function C2 C1 A shift in (not wealth!), changes the position along the curve. - Decrease in Wealth - Higher interest rates /returns to investment - Expectations, e.g. * lower future * deflation DI1 DI2
3 10. Function 10. Function 9 11 The aggregate Function The aggregate Function Autonomous Level (negative savings) C=DI Note: - the relationship between DI and C is almost 1! - Typical savings rate between 4-10% of in the U.S. More aggregate consumption can occur through - a (true or believed) increase of aggregate wealth (e.g. housing prices up, stock market up) - Lower interest rates / investment returns -Expectations for * Higher future inflation * Higher future dissaving Break-even saving 10. Function 10. Function The aggregate Function Consumer Confidence & Less aggregate consumption can occur through - a decrease of aggregate wealth - Higher interest rate / investment returns -Expectations for * deflation * lower future New Zealand U.S.
4 10. Function 10. Function 13 Marginal Propensity to Consume (MPC): Individual How much more do we spend in consumption with one extra dollar of? 15 Marginal Propensity to Consume: Aggregate Case Again, the slope of the (here, aggregate) consumption function is the MPC. C2 C1 The slope of the consumption function f (x) for some x, is called the marginal propensity to consume (MPC) at x. Since the aggregate consumption function is virtually linear, we can get the slope from any two points on the line. DI1 DI2 10. Function 10. Function Marginal Propensity to Consume (MPC): Individual = how much more do we spend in consumption with one extra dollar of? Example: Someone earning $x gets a salary increase of $1. Of the increase she spends $0.90 on consumption and saves $0.10. her MPC (at x) = 90% = 0.9 Marginal Propensity to Consume: Aggregate Case C C DI = slope = MPC Also, her Marginal Propensity to Save MPS (at x) = 10% = 0.1 Note: MPS + MPC = 1 DI
5 10. Function 10. Function Example: Given the following graph, what s the MPC? MPC vs. APC Average Propensity to Consume (APC) = Total consumption /Total one point on the consumption function is enough. $9.975 trill. $9.5 trill $10 trill. $10.5 trill APC = C / DI Fraction of consumption in total MPC = ΔC / ΔDI What we spend on consumption with an increase of 10. Function 10. Function Example: Given the following graph, $9.975 trill. $9.5 trill what s the MPC? MPC = C / DI MPC = ( ) / ( ) = 0.475/.5 = 0.95 MPS = 0.05 The aggregate Function DI C S C(DI) = DI $10 trill. $10.5 trill Break even at D.I = C =
6 10. Function 21 Any Questions?
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