ECN 203 1nd Edition Lecture 23Outline of Last Lecture II. Examples of ADIII. Aggregate SupplyOutline of Current Lecture IV. Consumption V. Sources of consumption spendinga. Consumption functionCurrent LectureLecture 3/20/1513.1 Consumption - The aggregate nominal amount spending consumers do. It makes about 65-70% of AD. - Sources of the Forces that Determine the Level of Co Permanent income: in the aggregate it is a function of long term expected income status. Everyone has a perception of their permanent income. The amount we need and have been able to count on to maintain our current lifestyle. If we see our prospects improving we spend more. If we are experiencing a hard time, we use accumulated wealth/savings to maintain our lifestyle. If times become harder we adjust our perception of our permanent income. - Sources of Consumption Spending o The amount of current aggregate income in the economy determines the amount of production in the economy because the funds paid for that production becomes people’s incomes. Current nominal aggregate income = GDP (P*Y)o Consumption Function: C = A + b (PY)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. C = aggregate nominal consumption PY is nominal GDP - Price level * Real GDP- PY = nominal aggregate income ‘b’ = marginal propensity to consume - The proportion of nominal aggregate income that is used for consumption - Consumer Confidence: if consumers see their prospects as brightening and they sense that the future is secure they are more comfortable spending their income. Therefore, ‘b’ increases because they feel confident to live a more satisfying lifestyle. 1-b is the portion used for savings o If PY = $100 bill and b = 0.8 for the nation, as a nation we’d spend $80 bill of our income on consumption and save $20 bill of our income. ‘b’ is not a constant, it varies across nations. It changes with expectations about the future. So economists closely watch the Consumer Confidence Index. o Increasing consumer confidence helps the economy because when people are more confident they are more willing to spend on consumption If C increases, then AD increase, which drives Y up, and decreases unemployment. o ‘A’ is autonomous consumption: it is independent of PY. It is spending out of wealth, often to shy away from difficult times, as many did in the Great
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