The Nation’s Marginal Propensity to Consume

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Presentation transcript:

The Nation’s Marginal Propensity to Consume 123

The Marginal Propensity to Consume Remains Constant

The Consumption Function Real Consumption 500 Autonomous Consumption Real Disposable Income

The Consumption Equation? C = a + bY Income Autonomous Consumption MPC Induced Consumption

Calculate C for each level of National Income (Y) 100 180 280 400 540 C = a + bY = 80 + .80 (400) = 400 C = a + bY = 70 + . 70 (300) = 280 C = a + bY C = a + bY = 90 + .90 (500) = 540 C = a + bY = 60 + .60 (200) = 180 = 100 + = 50 + .5 (100) = 100

What is Saving? That part of national income not spent on consumption If, Y = C + S then, S = Y – C

What is the Marginal Propensity to Save (MPS)? The Ratio of the change in saving to the change in income, which induced it.

Lets assume that your income increases by $100 Lets assume that your income increases by $100. We observe that you increase your consumption by $80. What is your MPC? $60. 60 .60 40 .40

MPC + MPS = 1 MPC = 1– MPS MPS = 1 – MPC

At each Y level, calculate the MPC, MPS and the S – 60 . 80 . 20 – 40 . 80 . 20 – 20 . 80 . 20 . 80 . 20 20 . 80 . 20 40 MPC + MPS = 1 Y = C + S

Isosceles $ in million 150 100 150 100 100 150 Y in million $ 100 45o 100 150 Y in million $ 100

C $ 45o Y y* $ S y* Y

What is Intended Investment? Investment spending that producers intend to undertake

Why do you say that investment is Autonomous? Because generally, Investment is considered to be independent of the level of income When we say that Investment is autonomous, we mean that it is autonomous to income.

What determines Autonomous Investment? Level of technology

What determines Autonomous Investment? Level of technology Interest rate

Bank Apartment 10% 15% 12% 8% 9% 11% 20% 18% Restaurant Toy Store Packaging 9% 11% 20% 18% Restaurant Toy Store Coffee Shop

What determines Autonomous Investment? Level of technology Interest rate Expectations of growth Rate of capacity utilization

The Effect of Changes in the Rate of Interest on the Level of Investment 128

C+Ii C, S C = a + by I 45o Y

Why is investment volatile? Because factors that influence investment sometimes change in unison to create dramatic increases or decreases in investment