Consumption function-what is the relationship?
Answer:Consumption function is the relationship between cons
umption and disposable income
Disposable income only goes to two area. What are they?
Answer:Consumption and savings
Know relation: disposable income (yd) goes only to two area: c
onsumption and savings, if yd=0, and consumption is 100, what
is savings?
Answer:As disposable income goes up, savings and consumpti
on increase (direct relationship).
Ex: if disposable income is $0 that means that you have no mo
ney, so if your consumption is $100 that means are getting the
money from somewhere else (a loan) because you have $0 to s
pend. This means that your savings is a negative number.
Know about and interpret the marginal propensity to consume/
save, i.e. Mpc+mps=1
Answer:Mpc- the proportion of aggregate raise in pay that a co
nsumer spends on the consumption of goods and services as o
pposed to saving it.
, Mpc= change in consumption /change in disposable income
Mps- the proportion of aggregate raise in pay that a consumer s
pends on saving rather than on the consumption of goods and
services.
Mps= change in savings/ change in disposable income
If interest rates changes, what happens to consumption functio
n
Answer:Interest rates go up consumption goes down and vice v
ersa
What relation is shown on the aggregate expenditure curve
Answer:Between aggregate expenditure and real gdp
Define autonomous expenditure
Answer:-anything that you have to pay for regardless of your in
come
-could also be unexpected expenses
Ex: if you have to pay your rent and also want to buy new shoe
s the autonomous expenditure would be your rent because you
have to pay for it.
Ex: if you break your phone it would be an auto. Exp. Because
you have to get it fixed.
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