ECON 0110 1st Edition Lecture 19PLOTTING THE CONSUMPTION FUNCTIONExample: C = 6 + .7 YdPlot C on the vertical axisPlot Y or Yd on the horizontal axisAn easy way to plot the consumption function is to select some values of Y and find thecorresponding values of C.Example: C = 6 + .7 YdValue of Y 0 10 20 30 40Value of C 6 13 20 27 34Plot the points (C, Y): (6, 0); (13, 10); (20, 20), etc.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.These points fall on a straight lineINTERCEPT= AUTONOMOUS CONSUMPTIONIntercept = 6 = Value of C when Yd = 0= Autonomous consumptionThe intercept on the vertical axis is C = 6AUTONOMOUS CONSUMPTION =Consumption spending that does not depend on the level of income (or GDP)AUTONOMOUS SPENDINGAny spending that does not depend on the level of income or GDPAutonomous Consumption SpendingAutonomous Investment SpendingAutonomous Government SpendingAutonomous Foreign SpendingSLOPE = MARGINAL PROPENSITY TO CONSUMEIf Y increases by 10, C increases by 7Slope = (Change in C)/(Change in Y)= 7/10 = .7Amount that C increases when Yd increases by 1 unitSLOPE = Marginal Propensity to ConsumeThe proportion of an increase in income that is spent by consumersMPC = (Change in C) / (Change in Yd)= C / YdINDUCED CONSUMPTION= the increase in consumption spending caused (or induced) by an increase in incomeSuppose MPC = .7Example: C = 6 + .7 YdIf income increases by $10,000, consumption will increase by $7,000Yd = 10,000C = 7,000MPC = 7000/ 10,000 = .7PARALLEL SHIFTS IN THE CONSUMPTION FUNCTIONA change in the INTERCEPT causes the consumption function to shift parallel to itself with nochange in the slope.Some factors which can cause the consumption function to shift upward1. An increase in wealth, such as a rise in the stock market2. A decrease in interest rates which makes borrowing less expensive3. An increase in expected future income such as a job promotion4. A large increase in current or expected inflationExample: C = 6 + .7 YdC = 10 + .7 YdCHANGING THE SLOPE OF THE CONSUMPTION FUNCTIONAn increase or decrease in the slope causes the consumption function to become steeper orflatter (with no change in the intercept).Example: C = 6 + .7 YdC = 6 + .8 YdThe MPC takes a value between 0 and 1.0 < MPC <
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