Macro final exam - 45 degree line

What is the 45 degree line diagram?

Gives you two equal distances on both sides

* therefore, is used as a point of reference regarding equilibrium

What is the consumption function?

Consumption = Autonomous spending (a) + MPC x Disposable income (Y)

What does the consumption function show?

Shows the level of consumption as it relates to disposable income

Spending is dependent on income

Higher income = more spending

What is autonomous spending?

The spending which isn’t influence by income e.g. food

What is the equation for change in consumption?

Change in consumption = change in disposable income x MPC

What is consumption more responsive to?

Change in income in the long run

What is the equation for total consumption?

Total consumption (Ct) = Consumption of domestic goods (Cd) + Consumption of imports (Cm)