Consumption Spending

Consumption spending (C) = autonomous spending + induced spending

C=5+0.6Y 5=autonomous spending, 0.6Y=induces spending(1)

mpc(marinal propensity to consume) = 485-5/800-0 = 0.6
House holds buys durable goods(more than 2 years), non durable ( and semi durable goods

Determinants of consumption spending
            • change in income ==> change in induced spending(movement along)
Change in autonomous spending
1. Wealth effect - wealth is the sum of all your assets less than your liabilities. if for e.g stock market is doing well, ur wealth effect will go up ==> autonomous consumption to go up(even though no increase in income)
2. Changes in prices (real balance effect) - if p goes down => the value of savings to go up=> savings to go down => auto consm to go up
3.Change in the age of durable good owned by consumers - As age of durable goods gets older, even thogh you don't have income, auto consm will go up
4. Change in consumer expectation - Confidence goes down (loss of job or mke less income) auto consm will go up; if you think you will get a raise lthough you have not seen it auto consm will go up
(1)Dr. Stephanie Powers, "Aggregate Demand", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)