Consumption Function
This economist introduced the consumption function.
John Maynard Keynes
The formula for the saving function.
S = −C₀ + MPS(Yd)
In macroeconomics, investment means spending on these.
Capital goods (machinery, buildings, equipment)
The relationship between interest rates and investment.
Inverse (negative)
Accelerator theory says investment depends on this, not the level of output.
Change in output (ΔY)
In C = C₀ + MPC(Yd), this term represents spending even when income is zero.
Autonomous consumption (C₀)
If MPC = 0.8, MPS equals this.
0.2
The most volatile component of aggregate demand.
Investment
When interest rates fall, this happens to investment.
Investment increases
The formula for the accelerator model.
I = δ × ΔY
The slope of the consumption function equals this.
MPC
When APC > 1, a household is doing this.
Dissaving (spending more than income)
Name the four types of investment.
Business fixed; residential construction; inventory; intellectual property
A government policy that reduces taxes on new capital purchases.
Investment tax credit
δ = 4, ΔY = $50M. Calculate investment.
$200 million
When the consumption curve is below the 45° line, households are doing this.
Saving (C < Y)
Income rises by $5,000 and saving rises by $1,000. Calculate MPS.
MPS = 1,000 / 5,000 = 0.2
Investment is profitable when this exceeds the interest rate.
Marginal Efficiency of Capital (MEC)
Pessimistic business expectations cause the investment demand curve to shift this way.
Left (decrease)
When ΔY = 0, net investment equals this.
0
Name two factors that shift the consumption function upward.
Higher wealth; higher consumer confidence; favorable fiscal policy (any two)
In a closed economy with no government, this must equal investment at equilibrium.
Saving (S = I)
Investment spending boosts income, which boosts spending further. This is called the ___.
Multiplier effect
Name two non-interest-rate factors that reduce investment.
Pessimism; external shocks; recession; falling MEC
These two economists developed accelerator theory
Thomas Nixon Carver and Albert Aftalion