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. 1- Shifts in the Consumption FunctionWhy would consumers decrease consumption if their disposable income has not changed? Or, in otherterms why might co decrease leading in turn to a decrease in demand, output, and so on? One of thefirst reasons that comes to mind is that even if their current income has not changed, they startworrying about the future and decide to save more. This is precisely what happened at the start of thecrisis of 2008.To analyze this fact, follow these steps:1-Go to the Federal Reserve Economic Data (FRED) https://fred.stlouisfed.org/. Download theseries DPIC96, PCECC96, PCDGCC96, and GDPC1 since 1999. Make sure all series are in real termsand in comparable units. Compile a single spreadsheet with these series.2- In the spreadsheet, construct a graph of disposable income, consumption, consumption ofdurable goods, and GDP in the US from 2008.Q1 to 2011.Q3. For this, normalize all variables toequal 100 in the first quarter of 2008. That is, 2008.Q1=100 for each of the variables. Make sureto adjust the range of the y-axis to show the evolution of the variables. Label your series with alegend.3- The NBER dates the crisis of 2008 from 2008.Q1 to 2009.Q2. Fill in the table below with the realchange of disposable income, consumption, consumption of durable goods, and GDP from2008.Q1 to 2009.Q2. In other words, how much did these variables contract during that period?What can you conclude about these contractions?Disposable ConsumpIncomeConsumpDurablesGDP2008.Q1 vs 2009.Q24- Why did consumption, and especially, consumption of durables, decrease despite relatively smallchanges in disposable income?

Question

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. 1- Shifts in the Consumption FunctionWhy would consumers decrease consumption if their disposable income has not changed? Or, in otherterms why might co decrease leading in turn to a decrease in demand, output, and so on? One of thefirst reasons that comes to mind is that even if their current income has not changed, they startworrying about the future and decide to save more. This is precisely what happened at the start of thecrisis of 2008.To analyze this fact, follow these steps:1-Go to the Federal Reserve Economic Data (FRED) https://fred.stlouisfed.org/. Download theseries DPIC96, PCECC96, PCDGCC96, and GDPC1 since 1999. Make sure all series are in real termsand in comparable units. Compile a single spreadsheet with these series.2- In the spreadsheet, construct a graph of disposable income, consumption, consumption ofdurable goods, and GDP in the US from 2008.Q1 to 2011.Q3. For this, normalize all variables toequal 100 in the first quarter of 2008. That is, 2008.Q1=100 for each of the variables. Make sureto adjust the range of the y-axis to show the evolution of the variables. Label your series with alegend.3- The NBER dates the crisis of 2008 from 2008.Q1 to 2009.Q2. Fill in the table below with the realchange of disposable income, consumption, consumption of durable goods, and GDP from2008.Q1 to 2009.Q2. In other words, how much did these variables contract during that period?What can you conclude about these contractions?Disposable ConsumpIncomeConsumpDurablesGDP2008.Q1 vs 2009.Q24- Why did consumption, and especially, consumption of durables, decrease despite relatively smallchanges in disposable income?

Accepted Answer

The propensity to consume is a crucial concept in economics that measures the relationship between…