Chapter 7 - National Income Determination

2. Consumption function or propensity to consume is the
schedule that relates consumption to disposable income.
The slope of the consumption function, or the marginal
propensity to consume indicates the percentage of each
additional peso of disposable income that will be consumed.
a = level of consumption at
zero disposable income
b = marginal propensity to
consume
(at break-even point)

3. Savings is the difference between consumption and income
Savings is zero at break-even point
S = savings
Y = income
C = consumption

4. Marginal propensity to consume is the slope of the consumption
function.
Marginal propensity to save is the slope of the savings function.

5. 1. INCOME = CONSUMPTION + INVESTMENT
Y = C + I C = a + by
Y = a + by + I
2. THE MULTIPLIER
Multiplier (K) =
1
1−MPC
Income generated (Yg) = Inv. x K

6. 3. THE GOVERNMENT AND THE EQUILIBRIUM INCOME
Y = C + I + G
G = government spending
Income generated (Yg) = G x K

7. 4. FISCAL POLICY
-When the government uses its power to influence total
spending either directly by changing its purchases of
goods and services or indirectly by altering the
disposable income through changes in the level of
taxation or transfer outlays.
Periods of Deflation = Deficit budget
Periods of Inflation = Surplus or Balanced budget