Ch. 13 Consumption and Saving

Suppose Kramer accidentally wins a carnival game and receives the grand prize of $950. If Kramer is currently unemployed and gets $1,000 a month from his family, and he has a marginal propensity to consume of 0.6, how much of the prize money will he spend? (.6x950)

$570

credit constraints

limits on how much you can borrow

In theory people will smooth their consumption according to their long-run estimates of income. In reality, there are constraints such as:

limits to borrowing or saving.

When the majority of the population is very young or in retirement, the economy is likely to experience a _____ savings rate because the majority of saving is done by people that are _____.

low; middle-aged

consumption smoothing

maintaining a steady or smooth path for your consumption spending overtime

Since you don't know if you will get a raise at work or if the business you work for is going to start laying people off, it can be difficult to make long-term plans because it is difficult to forecast:

permanent income.

precautionary saving

saving to be prepared for a financial emergency

The portion of income that you set aside rather than spend on consumption is defined as:

saving.

A temporary change in income, such as a brief spell of unemployment, results in _____ in consumption.

small changes

Because of consumption smoothing, temporary changes in income create _____ changes in consumption and permanent changes in income create _____ changes in consumption.

small; large

rational rule for consumers

Consume more today if the marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.

dissaving

The excess amount you consume above your income in a given period that you therefore must pay for by either withdrawing money from your savings or borrowing money

consumption

household spending on final goods and services

Parents concerned about the effects of climate change on their children will _____ their savings rate because they will be more likely to _____ a large sum for their children's future.

increase; bequest

net wealth

the amount by which your assets exceed your debts

marginal propensity to consume

the fraction of each extra dollar of income that households spend on consumption

permanent income hypothesis

the idea that consumption is driven by permanent income rather than current income

The benefit a person receives from spending another dollar on consumption is defined as:

the marginal benefit of consumption.

saving

the portion of income that you don't spend in a given period

_____ people earn more than the median income, and _____ people earn less than the median income.

Half of; half of

_____ is an example of consumption smoothing.

Helen spending only $30 on cover charges to parties tonight so that she can go to other places tomorrow

Suppose Bobby accidentally wins a carnival game and receives the grand prize of $500. If Bobby is currently unemployed and gets $1,500 a month from his family, and he has a marginal propensity to consume of 0.6, how much of the prize money will he spend?

$300

consumption function

a line plotting the level of consumption associated with each level of income

Which of these illustrates saving due to changes in needs?

a new father putting 10% of his paycheck into stocks for this child's college education

Identify the saving motive for the following situation. Elizabeth has long been an advocate for animal rights and has set up a fund so that when she passes there will be constant donations for 50 years to protect endangered species.

bequests

If Frank consumes $5,000 worth of goods and services every month and has a retail job and makes $50,000, then Frank is _____ the amount of $_____ a year.

dissaving; 10,000

The consumption function is _____ sloping because as income increases, total consumption _____.

upward; increases

disposable income

your after tax income

permanent income

your average lifetime income