Tuesday, April 6, 2010

Earn More, Spend More

Here is a post on Voxeu that might be helpful when discussing the link between income and demand - the marginal propensity to consume. The article looks at five questions about the relationship:
• How does household consumption respond to changes in economic resources?
• Does the response depend on the nature and duration of the changes?
• Do anticipated income changes have a different consumption impact than unanticipated shocks?
• Do transitory income shocks have a lower impact than permanent ones?
• What about small changes compared with large ones?

It also contains an interesting graphic that, in my opinion, would be helpful in explaining the connection. Let me know what you think.

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