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CONSUMPTIONANDSAVINGS
The additional income that the system generates by
the multiplier process savings outflow
If initially generated through borrowing -- savingsoutflow can be used for debt payments
Therefore, generating more income means more savingsoutflow to retire more debts and reduce what the economy
owes to its past accumulated savings.
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CONSUMPTIONANDSAVINGS
Income will be fully generated when the debtbalance is reduced to ZERO..
S= I , is reached
Accumulated savings outflow is just enough to payfor the said borrowings which financed the inflow ofinitial consumption.
Note : not to be misled by the conclusion that netsavings have been generated
We are only replacing what has been borrowed
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GRAPHICALANDTABULARILLUSTRATIONS
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FIG. 35 IN REFERENCETOTHEBOOK
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FIG. 35BOOK
X- axisIncome
Y- axisConsumption Line cconsumption line
Line yincome line, 45-degree
At the graphs point of origin, Income level is 0 whileconsumption on the other hand is 100 w/c isfinanced by the borrowings from the economysstock of savings
MPC= 0.80, M= 5
M=1
1()=
1
1(0.80)=
1
0.20= 5
Consumption changes by 80
when income changes by 100In reference to the graph.
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The multiplier process is illustrated by the
diminishing difference between line y and c
as the income level increases on the graph
Assumes that households are the
economys only factor contributors,
no circular flow leakages originates fromfirms
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First vertical arrow is the initial IncomeSecond vertical arrow represents the income
(consumption) that the system subsequently
generates
The length of the arrow diminishes as the
system generates more income indicating
the depleting effects of savings on circular
flow payments
The process stops at the point of
intersections of line y and c equilibrium
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The multiplier process also reflects how the
system generates income from every peso
of inflow
M = [ 1+ (mpc)+ (mpc2) + (3) n]
Where MPC < 1
n= infinitely small value implying thatnothing is left at this point to further generate
income
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ONTHEOTHERHAND
The 20 % of income goes to savings outflow and
creates
Dissavings less than
Savings
greater than
Income
Above the equilibrium level yields net savings
At the equilibrium levelneither net savings ornet dissavings
The borrowing of 100 from
the economys stock of
accumulated savings
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FACTORSOF
CONSUMPTION
Framework
Taste or Preference
Population
Income
Price Level
Innovation and Promotion
Engels law and the compositionalchange in consumption expenditure
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The consumption line pivots upward C2 wherein
The same increase in income yields greater
consumption and marginal propensity to consume
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FRAMEWORK
- demand factors are not the only direct
determinants of consumption..
Direct influences of these factors may alsodetermine consumption spending when
treated as an aggregate
Changes in determinant can vary the
economys propensity to consume.
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INREFERENCETOTHEGRAPHFIG, 36
and also
From 500- 550increase in consumption
Bigger leap in equilibrium income from 500 to1000
More consumption means more income left inthe circular flow for recirculation whichmultiplies into higher income levels
On the other hand, The multiplier worksnegatively when consumption decreases
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Income level can influence consumption as a
source
Additional income yields additional consumptiontherefore, income level varies directly with
consumption along line C in figures presented
Savings factors indirectly determine consumptionsince both can be traded for each other in the same
personal income