Models of Macro Economic Equilibrium

TOPIC II: The Income Expenditure Model A Simple Keynesian Model

OBJECTIVES: 
  1. identify and explain the determinants of consumption and savings.
  2. graph and explain consumption functions.
  3. define, interpret, and calculate the marginal propensities to consume, and to save and explain the relationship between them.
  4. explain the affects of taxes on consumption

KNOW THE FOLLOWING TERMS

APC 

MPC

autonomous consumption

marginal tax rates 

income expenditure model

planned expenditure schedule 

Permanent Income Hypothesis

consumption function 

multiplier

realized investment 

KEY CONCEPTUAL QUESTIONS

  1. What is a consumption function and what information does it give?
  2. What is the relationship between APC and disposable income? between MPC and disposable income?
  3. What is the significance of the income hypothesis and life cycle income hypothesis to the consumption function?
  4. How is consumption affected by various forms of taxes?