1. The Nation’s Marginal Propensity to Consume
123

2. The Marginal Propensity to Consume Remains Constant

3. The Consumption Function
Real Consumption
500
Autonomous Consumption
Real Disposable Income

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

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

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

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

8. 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

9. MPC + MPS = 1
MPC = 1– MPS
MPS = 1 – MPC

10. 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

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

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

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

14. 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.

15. What determines Autonomous Investment?
Level of technology

17. What determines Autonomous Investment?
Level of technology
Interest rate

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

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

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

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

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