Consumption

Question 1

What is consumption

Answer 1

The total expenditure by households on goods/services over a period of time

Question 2

How does an increase in income affect consumption

Answer 2

Consumption increases

Question 3

What is disposable and discretionary income

Answer 3

Disposable income is the amount of money remaining after taxes are deducted from a person’s earnings. Discretionary income, on the other hand, is the money left over after all essential expenses (like rent, food, and bills) have been paid, in addition to taxes

Question 4

Formula for disposable income

Answer 4

Gross annual income-(payable taxes + other deductions)

Question 5

What is the flow chart for how low levels of consumptions affects AD

Answer 5

Low levels of consumptions-income tax decreases-more disposable income-more spent on luxuries-consumption increases-AD increases

Question 6

What is average propensity to consume (APC) and what is the formula

Answer 6

A ratio that tells us how much an economy spends on consumption for every pound it earns
Consumption/income

Question 7

What is average propensity to save (APS) and what is the formula

Answer 7

A ratio that tells us how much an economy spends on saving for every pound it earns
Savings/income

Question 8

What does APC and APS add up to

Answer 8

1

Question 9

What is marginal propensity to consume (MPC) and what is the formula

Answer 9

An index which tells how much of an increase in national income will be developed to increase consumption spending

MPC= change in consumption/change in income

Question 10

What is marginal propensity to save (MPS) and what is the formula

Answer 10

An index which tells us how much of an increase in national income will be developed to increase savings spending

MPS= change in savings/change in income

Question 11

What does MPC and MPS add up to

Answer 11

1