Start typing, then use the up and down arrows to select an option from the list. # Macroeconomics

Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Income and Consumption
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Consumption Function (Consumption Schedule) 9m
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Marginal Propensity to Consume and Save 4m
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1 = MPC + MPS 2m
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Alright, so let's learn a detail here about the marginal propensity to consume and to save. So recall that when we talked about disposable income, we said that whenever we have disposable income wherever they were either going to use it for consumption, we're saving right? It's gonna be one or the other here. So it follows that any increase in disposable income, if we have extra disposable income, just like we saw, it's either gonna be consumed, we're saved, right? Any extra money we have, it's either gonna be consumed or saved, and that's going to depend on that marginal propensity of whether how much of that disposable income you want to consumer saved. So what follows here, what we see is that the disposable income equals the consumption or savings, right? Because any disposable income, we're either gonna consume it or save it. So that means any change in disposable income and I'll do change in, I'm gonna say why for disposable income? Because we've been using y for income in other videos, so change in y is gonna equal the change in consumption. Plus the change in savings, right? If we have an extra dollar of disposable income, well, it's either gonna increase our consumption or increase our savings so they're gonna stay equal there. So now what I wanna do is I want to take this and I want to divide it by the change in y So notice divide by the change in y if we do that to everything here, which we can do. Thanks to the rules of algebra, you're just gonna have to trust me if you don't remember that one, we can divide everything by the change in y. And what does what does that leave us with notice? Change in y divided by change and why? What is that equal? Anything divided by itself? Well, that's going to equal one, right? This equals one. And what does change in consumption over change in disposable income? Look back on the previous page, when we define marginal propensity to consume, right? The change in consumption divided by the change in income disposable income. Well, that's your marginal propensity to consume plus your marginal propensity to save. Okay, so that's what if the marginal propensity to consume plus the marginal propensity to save, they're always gonna equal one. And that's because this whole identity of whenever we have extra income. Well, it's gonna either be consumed or saved. Okay, So it's either gonna go towards the marginal propensity to consume or the marginal propensity to save their Okay, so sometimes they might give you um let's say in a problem, they might tell you, oh, the marginal propensity to consume is 0.6. Well, you can already infer that the marginal propensity to save is going to be the other 0.4, right? Because they have to equal out to one. All right, let's pause here. And let's talk about the consumption function as the equation of a line. Alright, let's do that in the next video
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Equation of the Consumption Function 2m
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Alright. So do you guys remember back to algebra when we learned the equation for a line? A lot of us might have learned it as Y equals mx plus B, write Y equals M. X plus B. Some of us learned it as Y equals A X plus B either way. Um We're talking about the same thing here and we're talking about a line and if you look back on the graph, remember when we talked about the consumption function? It was a line, right? And we knew what the slope was and we know what the variable is that's going to change our consumption. And let's go ahead and define some of these things here. So we can talk about the consumption function as a line, as an equation just the same. So in this case m M. Is what's being moved? Is the rate that we're changing here? So M is the slope of the line here, Which is which is what just classic algebra there, write Y equals mx plus B. M. Is the slope of the line. And in this case the slope just like we saw in the in the graph that's the marginal propensity to consume right for every extra dollar of income. Well, how much of it are we gonna consume? That's gonna be the increase in the line there. So what's gonna be the X. Here? What is driving the consumption the disposable income? Right? As we have more disposable income while we're consuming more. So X. Is disposable income, right? The disposable income? And what we use sometimes for for uh a symbol for this is we've been using Y. For income and sometimes we just call it y de sometimes with a little uh subscript D. Like that. Sometimes you see a whole full lower case letter D. Like we have in our equation below. And then what's gonna be B what's B. Remember B. Is the Y intercept? Right? The Y intercept. And this is what what the amount of consumption that we have when disposable income equals zero, right? When we have no disposable income, well we're still gonna have to consume something, right? We're still gonna have food to eat, we're still gonna need shelter, we're still gonna need some expenses um when we have no disposable income. Okay so you can be given um an equation of the consumption function line. They can tell you um an equation like C equals 0.75 X. Plus 50. Right? Something like that. And you can solve for consumption at any level of disposable income if you had a disposable income of 10. Well you would put in 10 into this equation and you would solve for disposable income. Excuse me, solve for consumption there. Right. Cool. So that's about it here, let's get some practice using all of these equations in the next video
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Problem

Calculate the Marginal Propensity to Consume and the Marginal Propensity to Save using the following table: 6
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If the Keynesian consumption function is C = 10 + 0.8 Yd then, if disposable income is \$1000, what is amount of total consumption?

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If the Keynesian consumption function is C = 10 + 0.8 Yd then, when disposable income is \$1000, what is the marginal propensity to consume?

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An increase in the marginal propensity to consume will: 