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CSU ECON 204 - Consumption and Investment

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ECON 204 1st Edition Lecture 7 Outline of Last Lecture XI. Midterm PracticeA. Calculating GDPB. Nominal and real GDPC. EmploymentOutline of Current LectureXII. Income and ExpendituresCurrent LectureXII. Income and ExpendituresA household (in the basic sense) chooses either to consume or save. Marginal propensity to consume (MPC) is the increase in consumer spending when disposable income rises by $1. The MPC is between 0 and 1.Marginal propensity to save (MPS) is the increase in household savings when disposable income increases by $1.MPC+MPS= 1 dy= disposable income (can also be noted yd)MPC= change in consumption/dyMPS=change in savings/dyMultiplier: shows how initial changes in spending lead to further changes.Example: Increase in consumption spending $100 billionMPC x $100 billion (second round) smaller than $100 billion because MPC is a decimalMPC^2 x $100 billion (third round) even smaller because MPC^2 is a smaller decimalMPC^3 x $100 billion (fourth round)Total spending = 100(1+MPC+MPC^2+ MPC^3 etc.)a = (1+MPC+MPC^2+ MPC^3 etc.) MPC(a) = a(MPC+MPC^2+ MPC^3 etc.)a-MPC(a) =1a=1/1-MPC (same as first a)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Total spending = change in spending(m)Spending= C+I+GIn the end real GDP increases by more than the initial amount rise in consumption spending. Example: initial rise of $100 billion in consumption spendingMPC= 0.6Total spending (in GDP) = 100(1/1-0.6) = 100(1/0.4) = 250GDP rises by $250 billion as a consequence of $100 billion rise.Total consumption (on graph) = MPC(dy) +a <- linear graphThe aggregate consumption function shows how disposable income affects consumer spending. For most Americans their house is a large part of “a”.If their house loses value the person’s entire aggregate consumption function decreases. If people’s wealth decreases their spending


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