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    income and consumption relationship

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    Discuss the income and consumption relationship make sure to define marginal propensity to consume. If you received an extra dollar, how much of it would you spend?

    Why is the aggregate demand curve downward sloping? Specify how your explanation differs from the explanation for the downward sloping demand curve for a single product.

    Explain: "Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply." In each case, specify price level outcomes

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    Solution Preview

    Income and consumption are positively related. In terms of economic theory each rational individual tries to maximize his/her utility, and the most important component of that utility is consumption. This utility maximization is subject to the amount of money you have, and hence the more you have the more you can raise your utility. This combines with the relation between consumption and utility to say more income implies more consumption.

    In a more basic form it is something based on common sense: if you have more money you spend more, if not you do not spend as much. Think about the Academy Awards Ceremony (the Oscars). The stars all wear clothes that night which is more than what an average person spends on them in one year. The only difference is they make a lot more money!

    The relation though is not 1-on-1. So if your income goes up by $1 your consumption generally goes up by less than a $1. More precisely, if your disposable income (income - taxes + transfers) goes up by $1 your consumption will go up by some amount x ...

    Solution Summary

    An income and consumption relationship is assessed.

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