Lecture 5- Consumption, Saving, and Investment

Consumption

Refers to household spending on final goods and services.

Consumption

__________ makes up the largest component of GDP

Consumption

Spending on food, electricity, computers, and more are examples of _____________.

Consumption Function

Shows how different levels of income lead to different levels of consumption.

Marginal Propensity to Consume

What does MPC stand for?

Marginal Propensity to Consume

Fraction of each extra $ of income that households spend on consumption.

The how consumption responds to a change in income.

What does MPC show?

Saving

The portion of income that you set aide rather than spending.

Wealth

Accumulated stock of wealth over time

Budget Spending

An excess of the tax revenue over gov’t spending

Budget Deficit

A short fall of tax revenue.

Productivity of Capital

A firm should borrow to fund an investment if (and only if) expected return is greater than interest rate on that loan.

Investor Confidence

The expected economic conditions get better bc firms demand more funds.

Gov’t Policy

Gov’t can change taxes

Shift Downward

The Federal Reserve raises interest rates

Shift upward

The stock market rises to a record high

Shift Upwards

The gov’t gives a one time tax-rebate.

Shift Upwards

People start feeling better about economic prospects.

Shift Downwards

The government raises taxes to pay off some of its debt.

Shift downwards

House prices plunge.