First, consumption expenditure increases as income does. For every increase in income, consumption increases by the MPC times that increase in income. Thus, the slope of the consumption function is the MPC. Second, at low levels of income, consumption is greater than income. Even if income were zero, people would have to consume somet hing. We call the level of consumption when income is zero autonomous consumption , since it shows the amount of consumption independent of income.
Thus, to calculate consumptio n at any level of income, multiply the income level by 0. Figure 1. The Consumption Function. In the expenditure-output model, how does consumption increase with the level of national income? Output on the horizontal axis is conceptually the same as national income, since the value of all final output that is produced and sold must be income to someone, somewhere in the economy. A change in the marginal propensity to consume will change the slope of the consumption function.
A number of factors other than income can also cause the entire consumption function to shift. These factors were summarized in the earlier discussion of consumption.
Output has settled in equilibrium at the level where the injections line, J , intersects the withdrawals line, W. In a four-sector economy, which of the following is assumed always to increase when GDP increases? In a four-sector economy, which of the following would not cause a change in MPE y? Suppose the government increases the tax on tobacco products, and suppose the demand for these products is inelastic.
How should this be analyzed on the multiplier model? Which of the following statements is true? King: Economics Chapter 19 Instructions Answer the following questions and then press 'Submit' to get your score. Also referred to as negative saving, dissaving can be examined on an individual level or on a larger economic scale. If the autonomous spending within a community or population exceeds the cumulative income of the included individuals, the economy has negative savings and it is likely taking on debt to finance its expenses.
A person does not need to experience financial hardship for dissaving to take place. For example, a person may have significant savings to pay for a major life event, such as a wedding, to use the accrued funds for a discretionary expense.
Governments allocate their available funds to mandatory, autonomous expenditures or discretionary expenses. Mandatory, or autonomous, expenditure includes funds mandated for specific programs and purposes that are considered necessary for the nation to function properly, such as Social Security , Medicare , and Medicaid.
In contrast, discretionary funds can be directed to programs that provide value to society but are not considered critical. Discretionary funds typically support programs related to certain defense activities, education, and transportation programs. The difference between autonomous consumption and induced consumption is that the latter should fluctuate depending on income.
Induced consumption is the portion of spending that varies depending on disposable income levels. As the value of disposable income rises, it is expected to induce a similar rise in consumption. People in this situation are likely to spend more money on living lavishly, making more purchases, and incurring greater expenses.
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