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14 Cards in this Set
- Front
- Back
The relationship between consumption and income
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Consumption function
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As national income increases, consumption spending increases, but by diminishing amounts. That is, as notion income increases, the MPC decreases
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Absolute income hypothesis
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The ratio of the change in consumption spending to a given change in income
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Marginal propensity to consume (MPC)
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As national income increases, consumption spending increases as well, always by the same amount. That is, as national income increases, MPC remains constant
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Relative income hypothesis
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A person's consumption spending is related to his or her permanent income
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Permanent income hypothesis
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Typically, a person's MPC is relatively high during young adulthood, decreases during the middle-age years, and increases when the person is near or in retirement
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Life-cycle hypothesis
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Permanent income is the regular income a person expects to earn annually. It may differ by some unexpected gain or loss from the actual income earned
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Permanent income
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the unexpected gain or loss of income that a person experiences. It is the difference between a person's regular and actual income in any year.
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Transitory income
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Consumption spending that is independent of the level of income
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Autonomous consumption
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That part of national income not spent on consumption
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Saving
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The change in saving induced by a change in income
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Marginal propensity to save (MPS)
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A line, drawn at a 45 degree angle, showing all points at which the distance to the horizontal axis equals the distance to the vertical axis
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Income curve or 45 degree line
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investment spending that producers intend to undertake
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Intended investment
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investment that is independent of the level of income
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Autonomous investment
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