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Consumption Function

The document discusses the concepts of injections and leakages in a three and four sector economy, detailing how they relate to the multiplier effect. It explains the formulas for calculating the multiplier (K) and the relationships between consumption (C), savings (S), government spending (G), and investment (I). Additionally, it highlights the impact of changes in income on consumption and savings, emphasizing the dual nature of the multiplier effect.

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11 views2 pages

Consumption Function

The document discusses the concepts of injections and leakages in a three and four sector economy, detailing how they relate to the multiplier effect. It explains the formulas for calculating the multiplier (K) and the relationships between consumption (C), savings (S), government spending (G), and investment (I). Additionally, it highlights the impact of changes in income on consumption and savings, emphasizing the dual nature of the multiplier effect.

Uploaded by

igupta.018
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Three sector economy

Injections- Investment + Govt spending

Leakages/ Withdrawl- Savings + Taxation

K= 1/MPW

Two sector: K=1/MPS Y=C+S Injections= Leakages Invt=savings I=S

Y= C+I

Three sector: K=1/MPS+ MRT Y=C+I+G

MRT= change in tax/ Change in income= 20/100= .2

I+G= S+T

Four sector

Injections- Investment+ Govt spending+ Exports

Leakages- Savings + Taxation + Imports

K= 1/MPS +MRT+ MPM

MPM= change in imports/ Change in income

Y= C+I+G+(X-M)

I+G+X= S+T+M

K=2

L=100

Fall in income= 200 (Backward action of multiplier)

Increase in income- forward action of multiplier

Multiplier is a two edged sword.

C= a + bY

C= consumption

a= autonomous consumption (at zero income level)- disavings

b= MPC

Y= disposable income
APC= C/Y

APS= S/Y

APC+ APS=1

Y= C + S

MPC + MPS=1

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