Notes 1 Define MPC equation 2 Define APC equation 3 What are the two basic hypotheses that Keynes believed about the APC and MPC 4 Define consumer wealth ID and significance 5 What three things shift the consumption function C Ftn 1 2 3 The consumption function is generally defined as C a b Yd where a is an intercept term or autonomous consumption and b is the slope term or the marginal propensity to consume MPC Yd is after tax income Graphically the consumption function C Ftn is upward sloping with an intercept above the horizontal axis A 45 degree reference line is drawn to show where we have consumption equal to consumer spending C Yd Where this crosses the C Ftn is YBE or break even level To the left of YBE there is dissaving and to the right of YBE is saving APC 1 dissaving APC 1 break even APC 1 saving 6 Suppose we have a consumption function C 10 000 0 8 Yd a What is the MPC for this equation What is their autonomous consumption b How much would consumer spending C amount to for a family with after tax income of 100 000 c Are they breaking even Why or why not d What is their APC e What is their level of savings S 8 Now suppose we have a C Ftn C 20 000 0 8 Yd A family has after tax income of 100 000 a What is their consumer spending C b What is their APC c What is their level of savings S 9 Using a consumption function diagram illustrate the Fed decides to lower interest rates How does this affect the overall level of economic activity
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