ECON 1113 1st Edition Lecture 10 Outline of Last Lecture I Introduction The Role of Consumer Spending in the Keynesian Short Run Model II Determinations of Consumer Spending III Two Basic Measures IV Two Basic Hypotheses about Consumer Spending V An Illustration Outline of Current Lecture I The Keynesian Consumption Function A Numerically B Graphically C Mathematically D Shifts in the Consumption Function E Case Study 1 Stock Market Crash of 1987 Current Lecture I The Keynesian Consumption Function C Ftn A Numerical 1 All lecture examples refer to this basic table of numbers Yd C A 0 5000 B 20000 20000 C 100000 80000 B Graphical 1 Describes consumer spending in the economy 2 Marginal Propensity to Consume MPC C a Equation Yd b The slope of C Ftn i Rise recognizes a change in C 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 ii Run recognizes a change in Yd iii Together they formulate the MPC c Example i MPC 15000 20000 0 75 3 Break Even Income YBE a YBE implies that C Yd b Example i 20000 20000 at point B ii So the average propensity to consume APC C Yd iii 20000 20000 1 c 45 Degree Reference Angle i C Yd ii Crosses the C Ftn at the break even point iii YBE occurs when the C Ftn intersects the 45 degree reference angle iv Savings S or dissavings negative S are shown by the vertical distance between C Ftn and the 45 degree reference line v The shrinking vertical distance between the C Ftn and the reference line conveys shrinking dissavings vi The increasing vertical distance between the C Ftn and the reference line conveys growing savings 4 Finally the APC is shown by the slope of a line from the origin to the point of interest on the C Ftn a Note the slope of a line from 0 to break even 1 APC as C Yd Consumption Function C Ftn C Yd Consumer Spending C in dollars 120000 100000 80000 60000 40000 20000 0 0 20000 40000 60000 80000 100000 120000 Disposable Income Yd in dollars C Mathematically 1 C a b Yd 2 C consumer spending 3 Yd disposable income 4 a autonomous consumption C that does not depend on Yd a Equals vertical intercept of the C Ftn b 5000 in example 5 b slope term a Equals slope of the C Ftn C b Yd c Example i Table numbers can all be reproduced using the equation C 5000 0 75 Yd D Shifts in the C Ftn 1 Suppose credit conditions ease interest rates decrease and or 2 Suppose consumers expect higher future incomes and or higher future consumer goods prices a The C Ftn shifts upward in both of these situations due to lower interest rates and expectations of higher future incomes or prices E Case Study 1 Stock Market Crash of 1987 a October 1987 stock prices fell sharply closing down stock exchange b Fear lower stock prices would imply lower consumer financial wealth which would also shift the C Ftn down and because consumer spending is the largest part of the Planned Total Expenditure TE it becomes concerning c If the Planned TE decreases then overall economic activity will decrease causing a recession d Though predicted no recession ever occurred e Why did it differ from the stick market crash of 1929 i Policy Response Decision to lower interest rates C Ftn returned to normal due to lower interest rates In 1929 the interest rates were not lowered
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