III. UNIT III

1
III. UNIT III
B. The Consumption Function
1. Autonomous consumption...
identification and determining
factors
2. Induced consumption...
identification and determining
factors
3. Calculation of MPC and MPS
C. Determinants of Planned Investment
D. Composition of Aggregate Demand
E. Identification of recessionary
and Inflationary Gaps
2
MARGINAL PROPENSITY TO
CONSUME
(MPC)
INCREASE
THE FRACTION OF A(N)
DECREASE
DECREASE IN INCOME WHICH
IS USED FOR EXTRA CONSUMPTION
IS USED FOR EXTRA CONSUMPTION
EXPENDITURES
EXPENDITURES
IS RELECTED AS
IS REFLECTED AS
DECREASED CONSUMPTION EXPENDITURES.
DECREASED CONSUMPTION EXPENDITURES.
3
MARGINAL PROPENSITY TO
CONSUME
(MPC)
INCREASE
THE FRACTION OF A(N)
DECREASE
DECREASE IN INCOME WHICH
IS USED FOR EXTRA CONSUMPTION
IS USED FOR EXTRA CONSUMPTION
EXPENDITURES
EXPENDITURES
IS RELECTED AS
IS REFLECTED AS
DECREASED CONSUMPTION EXPENDITURES.
DECREASED CONSUMPTION EXPENDITURES.
IN CONSUMPTION
EXPENDITURES
MPC
IN DISPOSABLE
INCOME
4
MARGINAL PROPENSITY TO
CONSUME
(MPC)
INCREASE
THE FRACTION OF A(N)
DECREASE
DECREASE IN INCOME WHICH
IS USED FOR EXTRA CONSUMPTION
IS USED FOR EXTRA CONSUMPTION
EXPENDITURES
EXPENDITURES
IS RELECTED AS
IS REFLECTED AS
DECREASED CONSUMPTION EXPENDITURES.
DECREASED CONSUMPTION EXPENDITURES.
IN CONSUMPTION
EXPENDITURES
MPC
IN GDP
5
MPC .75 OR 75 OR 3/4
6
MPC .75 OR 75 OR 3/4
IF INCOME WERE TO RISE
BY 100,
INDUCED CONSUMPTION WOULD
RISE BY THREE FOURTHS
OF 100.
(OR BY 75)
7
MARGINAL PROPENSITY TO
CONSUME
(MPC)
INCREASE
THE FRACTION OF A(N)
DECREASE
DECREASE IN INCOME WHICH
IS USED FOR EXTRA CONSUMPTION
IS USED FOR EXTRA CONSUMPTION
EXPENDITURES
EXPENDITURES
IS RELECTED AS
IS REFLECTED AS
DECREASED CONSUMPTION EXPENDITURES.
DECREASED CONSUMPTION EXPENDITURES.
IN CONSUMPTION
EXPENDITURES
MPC
IN GDP
8
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
1650
1000
2400
2000
3150
3000
3900
4000
4650
5000
5400
6000
6150
7000
6900
8000
7650
9000
8400
10000
9150
11000
9900
12000
10650
13000
14000
11400
9
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
1650
750
1000
2400
750
2000
3150
3000
750
3900
4000
750
750
4650
5000
5400
6000
6150
7000
6900
8000
7650
9000
8400
10000
9150
11000
9900
12000
10650
13000
14000
11400
10
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
1000
1650
750
1000
2400
1000
750
2000
3150
1000
3000
750
3900
4000
750
1000
750
4650
1000
5000
5400
6000
6150
7000
6900
8000
7650
9000
8400
10000
9150
11000
9900
12000
10650
13000
14000
11400
11
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
1000
1650
750
1000
2400
1000
750
2000
3150
1000
3000
750
3900
4000
750
1000
750
4650
1000
5000
5400
6000
IN C
6150
7000
MPC
6900
8000
IN GDP
7650
9000
8400
10000
9150
11000
750
9900
12000

10650
13000
1000
14000
11400
12
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
3
1000
1650
750
1000
4
2400
1000
750
2000
"
3150
1000
3000
750
"
3900
4000
750
1000
"
750
4650
1000
5000
"
5400
6000
IN C
6150
7000
MPC
6900
8000
IN GDP
7650
9000
8400
10000
9150
11000
750
9900
12000

10650
13000
1000
14000
11400
13
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
3
1000
1650
750
1000
4
2400
1000
750
2000
"
3150
1000
3000
750
"
3900
4000
750
1000
"
750
4650
1000
5000
"
5400
6000
IN C
6150
7000
MPC
6900
8000
IN GDP
7650
9000
8400
10000
9150
11000
750

9900
12000
10650
1000
13000
?
13001
14000
11400
14
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
3
1000
1650
750
1000
4
2400
1000
750
2000
"
3150
1000
3000
750
"
3900
4000
750
1000
"
750
4650
1000
5000
"
5400
6000
IN C
6150
7000
MPC
6900
8000
IN GDP
7650
9000
8400
10000
9150
11000
750
9900

12000
10650
1000
13000
1
.75
?
13001
14000
11400
15
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
3
1000
1650
750
1000
4
2400
1000
750
2000
"
3150
1000
3000
750
"
3900
4000
750
1000
"
750
4650
1000
5000
"
5400
6000
IN C
6150
7000
MPC
6900
8000
IN GDP
7650
9000
8400
10000
9150
11000
750
9900

12000
.75
10650
1000
13000
1
13001
10650.75
14000
11400
16
MARGINAL PROPENSITY TO
SAVE
(MPS)
INCREASE
(N)
THE FRACTION OF A(N)
DECREASE
DECREASE IN INCOME WHICH
IS SAVED
IS USED FOR EXTRA CONSUMPTION
IS REFLECTED AS
DECREASED SAVING.
17
MARGINAL PROPENSITY TO
SAVE
(MPS)
INCREASE
(N)
THE FRACTION OF A(N)
DECREASE
DECREASE IN INCOME WHICH
IS SAVED
IS USED FOR EXTRA CONSUMPTION
IS REFLECTED AS
DECREASED SAVING.
IN SAVING
MPS
IN DISPOSABLE
INCOME
18
MARGINAL PROPENSITY TO
SAVE
(MPS)
INCREASE
(N)
THE FRACTION OF A(N)
DECREASE
DECREASE IN INCOME WHICH
IS SAVED
IS USED FOR EXTRA CONSUMPTION
IS REFLECTED AS
DECREASED SAVING.
IN SAVING
IN GDP
MPS
19
MPS OF .25 OR 25 OR 1/4
20
MPS OF .25 OR 25 OR 1/4
IF ANNUAL INCOME WERE TO FALL
BY 2000, ANNUAL SAVING WOULD
FALL BY ONE FOURTH OF 2000.
OR 500
21
INCOME
MPC
C
GDP
REAL
equals
IN GDP
IN C
900
0
3
1000
1650
750
1000
4
2400
1000
750
2000
"
3150
1000
3000
750
"
3900
4000
750
1000
"
750
4650
1000
5000
"
5400
6000
IN C
6150
7000
MPC
6900
8000
IN GDP
7650
9000
8400
10000
9150
11000
750
9900
12000

10650
13000
1000
1
.75
13001
10650.75
14000
11400
22
MPC MPS 1
SO
1 - MPC MPS
1 - MPS MPC
ALWAYS!!!!!!!!!!!!!!
1 - .75 .25