# Macro Economics notes

**Topics:**Macroeconomics, Consumption function, Economics

**Pages:**3 (347 words)

**Published:**September 29, 2013

Aggregate Expenditure (AE);

AE = C + I + G + X – IM

I, G and X: autonomous expenditures

Do not change with change in national income (Y)

C and IM: induced expenditures

Change with changes in national income (Y)

Simple case:

Only at C and I

No government

No foreign sector

AE = C + I

[C] Keynesian consumption function:

Relationship between C and variables that influence it

In simple case:

C is influenced by disposable income

Desired Consumption Expenditure (C)

Disposable income: Either consumed (C) or saved (S)

Consumption is determined by current real disposable income (Yd) Ceteris paribus

Simple Keynesian consumption function:

C = a (bar) + bYd

Where “a” is autonomous consumption expenditure

bYd is induced consumption expenditure

Ex. C = 40 + 0.8Yd

If Yd is 100: C = 40 + 0.8(100)

= $40 + $80 = $120

Yd

C

0

$40

$100

$120

$200

$200

$300

$280

Slope of consumption = b = 80/100 = 0.8

Slope of 45* line is 1

Marginal Propensity to Consume (MPC) *this is the “b” term: change in desired consumption divided by change in disposable income slope of the consumption function: MPCyd = delta C / delta Yd This case

MPCyd = 80 / 100 = 0.8

Yd increases by $100

C increases by $80

MPC (0.8) is constant since slope of the line is constant

Average Propensity to Consume (APCyd) :

Total consumption divided by total disposable income (WILL BE ON TEST) APCyd = C / Yd

APCyd falls as level of income rises

Savings Function:

Marginal propensity to save (MPSyd):

Change in desired saving divided by the change in disposable income MPSyd = delta S / delta Yd

Average Propensity to save APSyd

Total desired saving divided by the total disposable income

APSyd = S / Yd

Yd is either consumed or saved:

APC + APS = 1

MPC + MPS = 1

All other changes affecting C

Shifts the consumption function

If wealth increases, spend more at every income level, shift consumption function Ex. If wealth increases:...

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