CHAPTER 5 - AGGREGATE DEMAND AND EQUILLIBRIUM OUTPUT

The Consumption (saving) function

Describes the relationship between consumption (saving) and income

Keynesians’ view on consumption

Private consumption spending by households primarily depends on the level of disposable income (YD=Y) they receive for providing labour and other factors of production

Consumption spending consists of:

• autonomous consumption - independent on the level of imcome

• Induced consumption

Autonomous consumption - Ca

Spending for necessary goods and services (food, clothes, housing)

Induced consumption

Depends on income - the more the higher the marginal propensity to consume (mpc).

Total induced spending - mpc*Y

Saving consists of:

• autonomous saving (Sa) - independent on income

• Induced saving (mps*Y)

• Mps = marginal propensity to save

S = -Sa + mps*Y

What does the marginal propensity to consume measure?

The slope of the consumption function curve.

The higher mpc, the steeper curve.

What does the Marginal propensity to save measure?

The slope of the saving function curve