The propensity to consume tells us by how much consumption changes for a given change in disposable income. To analyze this fact, follow these steps: 5- Go to the Federal Reserve Economic Data (FRED) https://fred.stlouisfed.org/. download the series A067RX1A020NBEA and PCECCA since 1999. Make sure all series are in real terms and in comparable units. Compile a single spreadsheet with these series. 6- In the spreadsheet, first compute the annual growth rate of disposable income and consumption for all years in the sample. Then compute the average for the period 2000-2017 for both variables. Finally, construct a demeaned measure of the annual growth rate of disposable income and consumption for all years in the sample. That is, let C t denote consumption in year t. Then, the growth rate of consumption between year t and t−1 is [(C t /C t−1 )−1], denoted by gC t. Now, let gC denote the average annual growth rate in consumption since 2000 . This number will stay fixed and not changing over time. Then the demeaned measure of the annual growth rate of consumption is gC t − gC for year t. (See Appendix 3 for more information). 7- Include a scatter plot of the demeaned measure of the annual growth rate of consumption and the demeaned measure of disposable income for the period 2000-2017. Use the x-axis for the demeaned growth rate of disposable income and the y-axis for the demeaned growth rate of consumption. Include axis titles for both variables. 8- Finally, add a linear trend line of the scatter plot and show the equation. 9- The equation that Excel produces for the trend line will have the following form: y=bx+e, where y is the growth rate of consumption, x is the growth rate of disposable income, b is a coefficient, and e will be close to zero. 10- Find b, the propensity to consume. Discuss how an increase in disposable income of $1 billion above the average is typically associated with an increase in consumption of $ b billion above the average.
The propensity to consume tells us by how much consumption changes for a given change in disposable income. To analyze this fact, follow these steps: 5- Go to the Federal Reserve Economic Data (FRED) https://fred.stlouisfed.org/. download the series A067RX1A020NBEA and PCECCA since 1999. Make sure all series are in real terms and in comparable units. Compile a single spreadsheet with these series. 6- In the spreadsheet, first compute the annual growth rate of disposable income and consumption for all years in the sample. Then compute the average for the period 2000-2017 for both variables. Finally, construct a demeaned measure of the annual growth rate of disposable income and consumption for all years in the sample. That is, let C t denote consumption in year t. Then, the growth rate of consumption between year t and t−1 is [(C t /C t−1 )−1], denoted by gC t. Now, let gC denote the average annual growth rate in consumption since 2000 . This number will stay fixed and not changing over time. Then the demeaned measure of the annual growth rate of consumption is gC t − gC for year t. (See Appendix 3 for more information). 7- Include a scatter plot of the demeaned measure of the annual growth rate of consumption and the demeaned measure of disposable income for the period 2000-2017. Use the x-axis for the demeaned growth rate of disposable income and the y-axis for the demeaned growth rate of consumption. Include axis titles for both variables. 8- Finally, add a linear trend line of the scatter plot and show the equation. 9- The equation that Excel produces for the trend line will have the following form: y=bx+e, where y is the growth rate of consumption, x is the growth rate of disposable income, b is a coefficient, and e will be close to zero. 10- Find b, the propensity to consume. Discuss how an increase in disposable income of $1 billion above the average is typically associated with an increase in consumption of $ b billion above the average.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The propensity to consume tells us by how much consumption changes for a given change in disposable income. To analyze this fact, follow these steps: 5- Go to the Federal Reserve Economic Data (FRED) https://fred.stlouisfed.org/. download the series A067RX1A020NBEA and PCECCA since 1999. Make sure all series are in real terms and in comparable units. Compile a single spreadsheet with these series. 6- In the spreadsheet, first compute the annual growth rate of disposable income and consumption for all years in the sample. Then compute the average for the period 2000-2017 for both variables. Finally, construct a demeaned measure of the annual growth rate of disposable income and consumption for all years in the sample. That is, let C
t denote consumption in year t. Then, the growth rate of consumption between year t and t−1 is [(C t /C t−1 )−1], denoted by gC t. Now, let gC denote the average annual growth rate in consumption since 2000 . This number will stay fixed and not changing over time. Then the demeaned measure of the annual growth rate of consumption is gC t − gC for year t. (See Appendix 3 for more information). 7- Include a scatter plot of the demeaned measure of the annual growth rate of consumption and the demeaned measure of disposable income for the period 2000-2017. Use the x-axis for the demeaned growth rate of disposable income and the y-axis for the demeaned growth rate of consumption. Include axis titles for both variables. 8- Finally, add a linear trend line of the scatter plot and show the equation. 9- The equation that Excel produces for the trend line will have the following form: y=bx+e, where y is the growth rate of consumption, x is the growth rate of disposable income, b is a coefficient, and e will be close to zero. 10- Find b, the propensity to consume. Discuss how an increase in disposable income of $1 billion above the average is typically associated with an increase in consumption of $ b billion above the average.
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