EP2 - Consumption and Keynes

therobbdj's version from 2015-04-13 13:23


Question Answer
What is consumption?It is the aggregate demand by households for goods and services to be used up for current consumption purposes
In relation to the other components of aggregate demand, what is its significance?It is the largest component of aggregate demand
What is expenditure?It is the money that people have actually spent upon goods and services
What is demand?It is the money that people are planning to spend on goods and services, and is a statement about how much will be spent in an economy under certain specified conditions
Under what situation is the economy in equilibrium?Whenever demand equals expenditure
What does the Keynesian Consumption Function do?It explores how, following an increase in household income, household consumption will (on average) increase by a less-than-proportional amount
What is the equation for the Keynesian Consumption Function?Consumption = Autonomous Consumption + Marginal Propensity to Consume (Real Income - Net Transfer Payments) (C=C0+C1 (Y-T))
What is autonomous consumption?It is consumption that will exist irrespective of disposable income
What is the Marginal Propensity to Consume?It is the coefficient which captures the change in consumption as a result of disposable income changing. According to the Keynesian Consumption Function, 0 < MPC < 1
What is disposable income?The income a consumer possesses after subtracting any net transfer payments
When plotting a graph of real consumption demand against real disposable income, what is the slope of the curve equal to?The Marginal Propensity to Consume
When plotting a graph of real consumption demand against real disposable income, what is the slope of a ray drawn from the origin to a point on the curve equal to?The Average Propensity to Consume
What is the Average Propensity to Consume?It is a measure of how much of an individual's total income is spent as a result of consumption. As disposable income increases, this ray will get shallower, meaning that consumers must be spending a smaller proportion of their total income on consumption