AGMT2

• The consumption function tells us the relationship between consumption level and the level of household disposable income
• Income is the determinant of consumption
• Sometimes, household spends more than its income and this is called dissaving.
• The term “marginal” to economists refers to extra or additional, “propensity” means tendency.
• Personal income is defined as the sum of compensation for employees, incomes of unincorporated enterprises, dividends received from corporations and net earnings and rents of persons, and all net current transfers.
• Personal disposable income is different from personal income only by the removal of all direct taxes on persons.  Hence, disposable income is the income that persons can freely use either for expenditure or for saving.
• Investment is the spending of business firms in capital goods. It is a decreasing function of the rate of interest.
• Intended investment is the amount of investment business firms plan to invest.
• Unintended investment refers to the change in business inventories due to discrepancy between aggregate supply and aggregate demand
• Realized investment is the sum of the intended and unintended investments.
• Unemployment is a condition of people who are able and willing to work but cannot find jobs.
• a.     Frictional Unemployment. It is a temporary unemployment associated with the changes in the economy.
• Structural Unemployment. A change in technology renders the skills and talents of some workers obsolete
• a.     Cyclical Unemployment. It is caused by the fall of business activities in the economy. It is caused by inadequate total spending. As the overall demand for goods and services decreases, unemployment rises.
• a.     Seasonal Unemployment. Many workers in farming and construction are laid off during slack periods.

   
• The Keynesian theory of employment - states that employment is determined by aggregate or total demand for goods and services.
• 1.     Shorter Work Week. A reduction of work week from 44-40 hours would increase the number of workers.

   
• 1.     Public investment. The government should utilize its resources to increase the needs for goods and services.
• Postponement of technological developments. It is claimed that the use of machines and labor-saving devices decreases the number of workers. Labor-intensive industries are recommended to developing countries to reduce unemployment
• Inflation occurs when there is a rising general level of prices. But it does not mean that all prices are increasing. Some prices remain constant, rice very suddenly, or even fall
• 1.     Demand-pull inflation. It occurs when consumers suddenly or seasonally demand some products, thereby allowing suppliers to increase prices to maximize their profits.
• Cost-push inflation. This type of inflation occurs due to increasing costs of production on the part of the producers or sellers. These increased costs may be the result of increased wages, increased prices of raw materials or even an increased desire on the firm to earn more profits
• 1.     Structural Inflation. This refers to the inability of some sectors of the economy to respond immediately to the demand for goods and services. When supply cannot meet demands, prices increase. When there are no constraints producers encourage to enter market if price is high. This increases supply, and therefore prices fall.
• ·          Wage-push inflation – increase in wage push prices of commodities
• ·          Commodity-push inflation – if raw materials increase in prices
• ·          Profit-push inflation – when a firm has a desire to increase their profit levels