MACROECONOMICS

Macroeconomics

Macroeconomics

Introduction

Macroeconomics deals with the aggregate economic process unlike microeconomics that is concerned with the individuals only. For instance increase in taxation and an inflation rate would have an impact over the consumption of Australian households thus that will be considered as a macroeconomic problem. It tends to focus on the aggregate behavior of households, government, industries and foreign investments and spending. Government is concerned about lowering the unemployment rates, focus on having stable prices and avoid inflation and consequently achieve economic growth by exerting its efforts for nourishing the economy. However to achieve these targets simultaneously is not an easier task as these all conflict with each other (Tucker, 2010, Pp. 213-217).

Discussion

Question 1

Use the consumption schedule to explain the determinants of household consumption expenditure.

Household consumption expenditure is based on the income of the household changes brought in income will have an impact over the consumption of household. Income that is earned is either saved or is consumed by the households. We construct the consumption line with the ceteris paribus assumption, which is that all other things are held constant but income varies. Income and consumption has a direct relationship, and increase in income increases the consumer spending and vice versa. However a change in factors other than income will shift the consumption line. If consumption increases level of savings decreases and if consumption declines there is rise in the savings. However it is also important to understand the term marginal propensity to consume that is the rate at which consumer spending increase due to a change in income. For instance if we say that income of consumers increased by AUS$ 1,000 and out of which they spent AUS $ 800 the MPC would be 800/ 1000 = 0.8, since the assumption is that the income is either consumed or saved therefore the remaining amount of the income which is AUS $ 200 or 0.2 would be the marginal propensity to save MPS. When the income level is zero then also there will be certain consumer spending as consumers will continue to spend on basic necessities at that point savings of these consumers will be negative. This consumption is known as autonomous consumption which remains constant at each level of income whereas induced consumption is tend to fluctuate with income. This consumption function can be written as C= a + c Yd. where, a is the autonomous consumption, c is the marginal propensity to consume and Yd. is the disposable income this shows a direct relationship of income with the consumer spending. This can also be illustrated with the diagram below.

Source: www.lidderdale.com

Consumption schedule is used to determine the relationship between income of the households and their consumption expenditure its determinants are marginal propensity to consume and average propensity to consume, autonomous consumption would be $1 since income level is zero and this amount is still consumed therefore resulting in dissaving. At every income level this autonomous consumption will remain the same as it does not vary with the income ...