Econ 104 1st Edition Lecture 16Outline of Last Lecture I. Aggregate Expenditure II. Classic Theory and Keynesian Theory Outline of Current Lecture I. Factors that Affect the C function II. Example Graphs Current LectureI. Factors that affect the Consumption ( C ) function a. Move along the C function i. Change in disposable incomeii. Change in taxesb. Shift in the C function (a change in the intercept, change in graph A)i. Change in household wealth ( W ) ii. Change in expected future income ( Ye)iii. Change in the price level ( P )iv. Change in the real interest rate ( r ) II. Example graphsa. A change in taxesi. A decrease in income taxes ( T ) increases Yd and C increases ii. Yd= ( Y – T)iii. C = f(Yd, T )iv. Suppose: 1. C = 1 + .75Yd2. C = 2.5 and Yd= 2 at point A3. Suppose Congress cut taxes which increases Ydto 4 trilliona. Yd= Y – T + TR i. Plug 4 into YdThese 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.b. Change in Wealth = Assets – Liabilities i. When W increases, the C function shifts up ii. C = f(wealth)iii. Assets: land, house, shares of stock, bonds, gold, cars, etc. iv. Liabilities: mortgage, loan, credit card debt, educational loans, car loan, etc. v. EXAMPLE: 1. Suppose stock prices climb dramatically as the economy improveswhich results in an increase in C at every level of Yda. Change in Assets = 2 trillion b. Original C Function i. C = 1 + .75Ydc. New C Function i. C = 3 + .75YdIII.Graph Ca. Change in future income: Yei. C = f (Ye)ii. Consumer confidence (CC) is good proxy for Yeiii. If CC is increasing, the C function shifts upwardiv. There are two measures of CC1. Index of consumer confidence 2. Index of consumer sentiment b. A change in the price level (P )i. If the price level increases, real wealth decreases and the C function shiftsdownwardii. Real Wealth Year X = (Nominal Wealth year x ) / [ CPI / 100 ]iii. Suppose interest rate increases from 2% to 4% with the original C function being: C = 3 + .75Ydiv. The real wealth falls and C goes down by 2 trillion at every unit of Yd1. C = 1 + .75
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