chapter 6 Flashcards
(20 cards)
major components of
private spending
- consumption
- saving
- investment
nations that save more and and consume later lead to
higher economic growth and output
major groups of consumption
50% food and beverage and housing
other groups apparel, transportation, medical care
what do poor families spend on
90% of their income on food and shelter
when you become more richer what do you spend on
luxury items
personal income-personal taxes=
disposable personal income
disposable personal income-personal outlays=
personal savings
explain points on graph of consumption function
on line:break even
above line:dis saving
below line: saving
what is mpc
response of consumption to change in income
how to calculate MPC
change in consumer spending/change in income
how to calculate MPS
change in saving/change in income
what is MPS
the amount people are willing to save when they get one extra dollar
determinants of consumption
- disposable income
- wealth
- expectation of future income
explain disposable income (determinant)
2 theories
first theory is permanent income model, if permanent income you spend more comfortably if it’s transitory you will not spend comfortably
second theory life cycle theory you save more during high income years and spend more during low income years
explain wealth (determinant)
the more money you have the more you spend
explain expectation of future income (determinant)
if you know you have large amount of income coming uou will send more comfortably
2 roles of investments
- impact aggregate demand and business cycle
- leads to capital accumulation
explain how investment impacts aggregate demand and and
business cycle
more investments>higher aggregate demand-economic boom
lower investment->lower aggregate demand-economic recession
important elements that private business investments worry about
- revenue
- cost
- future expectations
what are investments sensitive too
- taxes
- interest rate
- political environment
