Consumption Fundamentals
What is the term for the portion of consumption that occurs even when disposable income is zero?
Autonomous consumption
What is the formula used to calculate the Average Propensity to Save (APS)?
S / Y
Which component of aggregate demand is considered the most volatile?
Investment
How does uncertainty regarding business conditions affect investment?
It delays investment decisions
What happens to consumption when disposable income increases according to Keynesian theory?
Consumption increases, but less than the increase in income.
What represents the slope of the consumption function?
Marginal Propensity to Consume (MPC)
What is the sum of the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS)?
1
What is the relationship between the interest rate and the quantity of investment?
An inverse relationship
What happens to net investment when output decreases?
It falls sharply (or results in disinvestment)
What is the formula for disposable income used in consumption and saving analysis?
Disposable Income = Income − Taxes (Yd = Y − T)
Why does Keynes' Psychological Law suggest consumption increases when income increases?
Because consumption increases, but not by as much as the increase in income
When does dissaving occur in relation to disposable income?
When consumption exceeds disposable income
What is the definition of the Marginal Efficiency of Capital (MEC)?
The expected rate of
What two models combine to create cyclical economic fluctuations?
The multiplier and accelerator models
If MPC = 0.8, what is the value of MPS?
0.2
What is the economic situation called when the consumption level is above the national income level?
Dissaving
Which income group typically has an Average Propensity to Consume (APC) greater than 1.0?
Low-income households
What does the accelerator coefficient (\delta) represent in investment theory?
The ratio of required capital stock to output
Why does operating near full capacity drive firms to invest?
Because firms need to expand production capacity to meet increased demand
Why is investment considered unstable in the economy?
Because it is highly affected by expectations, interest rates, and business confidence.
What is the term for the point where the consumption function intersects the line representing aggregate demand equals national income?
Equilibrium point
In a simple closed economy, what must saving equal for the economy to be in equilibrium?
Investment (I)
Unlike interest rates, what does the accelerator model suggest is the primary driver of investment?
Changes in output or demand (\Delta Y)
What is one example of a non-interest rate factor that spurs investment through productivity gains?
Technological advancement
What happens in the economy when planned saving equals planned investment?
The economy reaches equilibrium.