economics Essay

1406 WordsFeb 19, 20096 Pages
“Aggregate Demand and Equilibrium Income” Consumer: The Driving Force of Aggregate Demand • Consumption – the total value of all newly produced goods and services purchased by households except for new houses. (Consumer Expenditure) Consumption Schedule • Disposable Income – the sum of all the incomes minus taxes plus transfer payments. o Transfer Payments – payments paid by government as grants to certain individuals. • Consumption Schedule – relationship between real disposable income and real consumption expenditure. Autonomous Consumption • Autonomous Consumption – the part of consumption that does not vary with disposable income. Marginal Propensity to Consume • Marginal Propensity to Consume – the fraction of each added dollar of real disposable income that goes to added consumption. o Average Propensity to Consume – ratio of real consumption expenditure to real disposable income. *Short Run vs. Long Run o Consumption spending tends to rise over long periods by about $0.90 for every $1 increase in disposable income. (Long Run). o People tend to change their consumption by less that $0.90 for every $1 change in income. (Short Run – year or less). Movement Along and Shifts in the Consumption Schedule • Wealth – total value of all assets that a household owns. • Price Level – change in the price level can affect the real purchasing power of nominal money balances. o A rise in price level means that a $20 bill in a checking account will buy less than before; a fall in price level means that it will buy more. • Expectations – any change in consumers’ expectations can cause a shift in the consumption schedule. • Net Taxes – taxes minus transfer payments. • Autonomous Net Taxes – taxes of transfer payments that do not vary with the level of domestic income. • Marginal Tax Rate – the percentage of each

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