The Consumption function and income determination (MPC AND MPS (MPC =…
The Consumption function and income determination
this is the governments use of its expenditure component of AD to influence the real GDP and employment
The fiscal multiplier, the multiplier theory says GDP will rise by a multiple amount
The presence of the fiscal multiplier offers a rational for increasing government spending in the economy in periods of recession
National income is closely linked to GDP, if GDP rises then national income will also rise and vice versa
the feedback effect from national income to consumer expenditure
The multiplier is the number that relates to the initial increase in expenditure and the final change in GDP
a rise in G gives a rise in GDP and NI, the rise in NI will rise C which leads to a further rise in GDP and NI and so on.
the size of the multiplier depends on the leakages ignoring tax and imports
The consumption function
The relationship between C and YD is described by the consumption function
the consumption function shows consumer expenditure at different levels of income
The marginal propensity to consume (MCP) - the mpc is the fraction of the additional pound of disposable income that is spent on goods and services
MPC- :small_red_triangle: C/ :small_red_triangle: Yd
where a= autonomous consumption and b = MPC
MPC AND MPS
MPC = marginal propensity to consume.
0 < MPC 1
MPS = marginal propensity to save.
0 MPS < 1.
The MPC and MPS must add up to one.
1 = MPC + MPS
Multiplier = 1/(1 - MPC) or 1/MPS
MPT AND MPM
T = MPT Yd
Where T = taxation and MPT is the marginal propensity to tax.
M = MPM Yd
Where M = imports and MPM is the marginal propensity to import.
Multiplier = 1/(MPS + MPT + MPM)