Economics Test 3

Explain the difference between "changes in the amount consumed" on a consumption function, and "changes in consumption."

"Changes in the amount consumed" is movement along the given consumption and is caused by a change in income. However, "changes in consumption" cause the entire function to shift up or down, due to changes in non-income factors.

What amount is someone saving if they are "breaking even" in their disposable income?

0

What are two stages of life which often correspond with the two types of dissaving?

A young adult may take out loans for education or to buy a house, and thus represent dissaving by borrowing against their future savings. An elderly person who is retired might exemplify dissaving by taking money from their retirement funds, thus drawing on past savings.

Describe the meaning of Price-Level

Average level of prices of goods and services (has to do with inflation/deflation).

Why does consumption vary directly, but not proportionally, with income?

Because part of our INCREASED income goes to saving.

What are the two ways in which "dissaving" occurs?

By drawing on past savings, or borrowing against future savings.

What are the two types of change involving consumption?

Change in the amount consumed, and change in consumption.

Describe the relationship between consumption and and income.

Consumption and income vary directly, which means when Income increases, consumption increases. When Consumption decreases, income decreases.

Describe the relationship between saving and income.

Consumption and saving vary directly, which means when income increases, saving increases. When Consumption decreases, saving decreases.

What is the relationship between the stock of durable goods on hand, and consumption?

Direct. The stock of durable goods on hand decreases as consumption decreases.

What is the most important factor in determining how much families/households/individuals can spend?

Disposable income

Translate the following equation into words: Y4= C + S

Disposable income equals consumption plus saving

Define "disposable income."

Disposable income is money that can be spent after taxes are paid.

What does the non-income determinant of consumption "Stock of Durable Goods on hand" relate to?

Durable goods, such as refrigerators and cars, are not purchased often. There are natural phases in which consumption of these items goes down, while people are still using what they have.

What do we mean by the term "non-income determinants of consumption?"

Factors that effect consumption levels (and thus shift the consumption function) that have nothing to do with changes in income.

What did Keynes consider to be a fundamental psychological law of disposable income?

If a consumer's disposable income increases, then that consumer will increase their spending and their saving.

Explain "Expectations" in the context of determinants of consumption.

If consumers think prices will be higher, they will increase consumption in the present.

Describe the relationship between wealth level and consumption.

If the level of wealth increases, consumption increases.

When the consumption is graphed, what does the forty-five degree line in the center represent?

It is drawn to indicate all of the points where consumption and disposable income are the same, or when there is a break-even point.

How is Price-Level, a no-income determinant of consumption, related to consumption?

It is inversely related. When the price-level increases, their is a decrease in consumption.

What is meant by the term "investment" in the context of spending?

It simply means spending in the business sector

If the level of saving is a positive number, than the corresponding consumption will be ____than income. Why?

It will be less than the income, because the person would have more income than they could consume. Thus, they would be able to devote part of that disposable income to saving.

What is "breaking even" in the context of consumption and saving?

Level of income is equal to the level of consumption, and saving is 0.

What does the non-income determinant of consumption, attitudes towards thrift, refer to?

People's attitudes towards saving.

Define the Consumption Function

Relationship between total consumption expenditure and disposable income, holding other determinants of consumption constant.

Translate the following equation into words: S=Y4 - C

Saving equals disposable income minus consumption

What is the name of Keynes' observations on the relationship between disposable income and consumption?

The Consumption Function

What is actual investment?

The amount of investment actually undertaken. It is equal to planned investment, plus any unplanned changes in inventories.

What is planned investment?

The amount of investment firms plan to undertake during a time period.

Define "wealth."

The net value of things you own.

What is the relationship between Expectations, a non-income determinant of consumption, and consumption?

They are directly related: When Expectations decrease, consumption (in the present) will decrease.

Describe the relationship between Interest Rates and Consumption.

They are inversely related. When Interest rate goes up, consumption goes down. When interest rate goes down, consumption goes up.

What do the Marginal Propensity to Consume and the Marginal Propensity to Save represent?

They represent how much someone is likely to consume versus spend with a given amount of disposable income.

Define "dissaving."

This is when expenditure on consumption is greater than disposable income.

Is wealth determined by how much money one makes? Why or why not?

Wealth is the net value of things you own. Wealth is not the same as income. However, income is often used to approximate wealth, since it is difficult to asses someone's true wealth.

List the six "non-income determinants of consumption."

Wealth, Price-level, Expectations, Interest Rates and Credit Conditions, Stock of Durable Goods on hand, and Attitudes Towards Thrift.

When you move___the consumption function, everything will be held constant.

along,

Actual investment is equal to planned investment PLUS___

any unplanned changes in inventories.

When level of income is equal to the level of consumption (and nothing is saved), a person is___

breaking even.

Both ___ and ___ vary directly with income.

consumption and saving.

When Income decreases, consumption____

decreases.

Consumption is a ___of income.

function

Consumption is a ____of income, and thus_____on it.

function, dependent

When income increases, saving___

increases.

Describe the "change in the amount consumed"

movement along the given consumption function, due to a change in income.

Describe the "change in consumption"

this is a shift in the entire consumption function either up or down, due to changes in non-income factors.