Econ Chapter 6

Permanent income hypothesis

A person's consumption spending is related to his or her permanent income

Relative income hypothesis

As national income increases, consumption spending increases as well, always by the same amount. That is, as national income increases, MPC remains constant

Absolute income hypothesis

As national income increases, consumption spending increases, but by diminishing amounts. That is, as national income increases, the MPC decreases

Autonomous Consumption

Consumption spending that is independent of the level of income

Intended Investment

Investment spending that producers intend to undertake

Autonomous Investment

Investment that is independent of the level of income

Permanent income

Permanent income is the regular income a person expects to earn annually. It may differ by some unexpected gain or loss from the actual income earned

Saving

That part of national income not spent on consumption

Marginal Propensity to Save(MPS)

The change in saving induced by a change in income

Marginal propensity to consume(MPC)

The ratio of the change in consumption spending to a given change in income

Consumption Function

The relationship between consumption and income

Transitory Income

The unexpected gain or loss of income that a person experiences. It is the difference between a person's regular and actual income in any year

Life-cycle hypothesis

Typically, a person's MPC is relatively high during young adulthood, decreases during the middle-age years, and increases when the person is near or in retirement