Consumption and Saving Functions

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What is the relationship between disposable income and savings?

An increase in disposable income will result in an increase in the level of saving, and vice versa.

How is the saving function derived from a consumption function?

The saving function can be derived from a consumption function because S ≡ Y - C.

What happens when Y = C?

When Y = C, then S = 0, which is the break-even income where households consume their entire income.

What is the average propensity to consume (APC)?

APC is the fraction or percentage of total income that is consumed. Signup and view all the answers

What is the relationship between APC and APS?

APC + APS = 1, indicating that households either consume or save their total income. Signup and view all the answers

What is the marginal propensity to save (MPS)?

MPS is the fraction or proportion of any change in income that is saved. Signup and view all the answers

What is the relationship between the size of the MPC and the multiplier?

The size of the MPC and the multiplier are directly related. Signup and view all the answers

What is the formula for the investment multiplier?

1 / (1 - b) Signup and view all the answers

What is the importance of the multiplier in the economy?

A small change in investment plans or consumption-saving plans can trigger a much larger change in the equilibrium level of GDP and income. Signup and view all the answers

In a 2-sector economy, what is the relationship between disposable income and total income?

Disposable income (Yd) is equal to total income (Y) since there are no taxes. Signup and view all the answers

What is the formula to calculate the equilibrium GDP?

Y = (a + I) / (1 - b) Signup and view all the answers

What does the investment multiplier measure?

The amount by which equilibrium GDP will increase/decrease whenever investment expenditure increases by one unit. Signup and view all the answers

What is the assumption in a 2-sector economy, and what is the relationship between Aggregate Expenditure (AE) and GDP?

The assumption is that AE = C + I, and AE = GDP. Signup and view all the answers

What happens when GDP is less than Aggregate Expenditure (AE)?

There is underproduction, UI < 0, and firms increase production, increasing output, employment, and income. Signup and view all the answers

What happens when GDP is greater than Aggregate Expenditure (AE)?

There is overproduction, UI > 0, and firms reduce production, decreasing output, employment, and income. Signup and view all the answers

What is the effect of introducing the government sector on the equilibrium level of output?

The equilibrium level of output will increase, and AE will increase to AE = C + I + G. Signup and view all the answers

How does taxation affect consumption and saving in the economy?

Consumption and saving will fall at each level of GDP because consumption now depends on disposable income (Yd) instead of total income (Y). Signup and view all the answers

What is the effect of an increase in income tax on Aggregate Expenditure (AE)?

The increase in taxes will decrease consumption spending, resulting in a decrease in AE. Signup and view all the answers

What is one of the causes of business cycles according to the innovations theory?

Irregular innovations that influence both investment and consumption spending, thus output, employment and the price level. Signup and view all the answers

How does a rise in aggregate expenditure affect the economy?

It increases the incentive to invest, thus output, employment and income increase. Signup and view all the answers

What happens to the economy when there is too little money chasing too few goods?

Output, employment and prices decline. Signup and view all the answers

How is the unemployment rate calculated?

Unemployment rate = (Number of unemployed people / Labour Force) * 100. Signup and view all the answers

What is the labour force?

The total number of economically active people (15 years and above) who are willing and able to work. Signup and view all the answers

What is unemployment?

A situation where people are able, available and willing to find work and actively seeking work, but not employed. Signup and view all the answers

What is the main purpose of a remedy in the job market?

To narrow down the gap between people searching for jobs and firms that are looking for workers. Signup and view all the answers

What is structural unemployment caused by?

Changes in the structure of demand for labour. Signup and view all the answers

What is an example of changes in production methods leading to job loss?

The introduction of automatic teller machines reducing the number of job opportunities for bank tellers. Signup and view all the answers

How can foreign competition lead to job loss?

Through the growth of highly competitive industries in other regions, destroying jobs in similar industries in industrial countries. Signup and view all the answers

What happens when consumer preferences change, leading to structural unemployment?

Jobs are lost in the industries that produce the goods or services that are no longer in demand. Signup and view all the answers

What is an example of structural decline leading to job loss?

A decline in certain industries, such as the textile industry. Signup and view all the answers