Micro Foundations of Macroeconomics: Theories of Consumption

A set of flashcards focusing on key terms and concepts related to the theories of consumption in macroeconomics.

Absolute Income Hypothesis

Suggests that current consumption is a function of current income, where consumption increases with income but less than the initial increase in income.

Marginal Propensity to Consume (MPC)

The portion of additional income that is spent on consumption, which tends to be higher for the poor than for the rich.

Average Propensity to Consume (APC)

The fraction of total income that is used for consumption; it declines as income increases.

Relative Income Hypothesis (RIH)

States that consumption depends on a family's income relative to others, rather than absolute income.

Permanent Income Hypothesis (PIH)

Argues that current consumption depends on a consumer's permanent income, which includes current and anticipated future income.

Life-Cycle Hypothesis (LCH)

Suggests that consumption is based on an individual's expected lifetime income and wealth.

Transitory Income

Unanticipated income that is temporary in nature, affecting consumption in the short term.

Cyclical Consumption Function

Consumption behavior that varies with economic cycles and conditions.

Secular Consumption Function

A long-term consumption behavior model that assumes stable growth patterns.

Consumption Function Shift

Changes in the consumption function due to variations in income or determinants like wealth, new goods, urban migration, and demographics.