7 good questions and answers: "Changes in Expected future disposable income"

What effect does bad news have on the aggregate consumption function?
  • This is information that lead consumers to expect lower disposable income in the future than they expected before
  • consumers will now spend less of their disposable income
  • there will be a decrease in aggregate autonomous spending
  • Graphically, the aggregate consumption function will shift to the left 
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What puzzling thougth does the theory of the consumption function solve
  • while we think the people with less money spend less the theory claims that they tend to spend more than their income.
  • people with higher current incomes save a larger fraction of ther income
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What does the theory of consumptions say about low income families?
  • those with lower income spend more than their incomes
  • However, that doesn't mean the overall spending rate increases.
    • People with lower income may have an unusually bad year, the might be laid off, and find a job eventually.
    • they expect those jobs to pay higher so the start spending more than their income today
    • so they tend to have low or negative saving.
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What does the theory of consumption say about hig income families
  • people with high current incomes may have an unusually goods year, having successfull investment
    • those people may expects their future income to be lower than their current income so they spend less and save more (to invest in the future)
    • so their savings will be high
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Although there may seem to be a strong relationship between current income and savings, What actually is true according to the theory of consumptions? What is this theory called?
  • It is thought that when the economy grows peopple tend to have higher incomes now which leads to higher savings today
  • However that is not the case
  • higher expected future income, leads to lower savings today for the rich or the pooer
  • which results to the conclusion that consumer spending depends on the income people expect to have than their current income in the long term.
  • this theory is called permanent income hypothesis?
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How does wealth have an effect on consumer spending?
  • The accumulation of wealth determines how much people spend on consumption
  • people who have accumulated wealth for their retirement  and have fewer loans to pay off tend to spend more
  • people who have not accumulated wealth tend to spend less of their income even though they have the same disposable income
  • so wealth definitely has an effect on current income even though current disposable income is the same
  • so graphically,  a rise in aggregate wealth lead to an increase in autonomous spending which in turn shifts the aggregate consumption function to the right.
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What economics model do we use to describe how consumer make choices about spending versus saving ? and why?
We describe consumer choices with an economics model called the life cycle hypotheses.
it also important in determining how or wealth affects consumer spending.
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