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The Reduction of Consumption Function in Economy - Term Paper Example

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In this paper demonstrates the Canadian government’s effort to influence the price of the hogs in the market in order to support farmers. Also, the author describes how to explore the farm policy through microeconomic analysis with the use of supply and demand…
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The Reduction of Consumption Function in Economy
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Download file to see previous pages The article entitled “A spent force” from the Economist dated October 16th, 2008 talks about the financial crisis and its effect on the spending of the whole US economy. According to the article, there are “ominous signs that the crisis will have a big impact on spending (2008, 1).” In order to assess the effects of the crisis on the spending of the US economy, we apply some macroeconomic tools for analysis.
The credit crunch in the economy, as a result of inappropriate lending, has been apparent up until now, even when the effects are expected to tone down after the government has given bailout efforts to rescue banks. While a function of the consumption side of the economy remains reliant on credit for purchases, this financial crisis definitely has some effects as apparent in our multiplier model.
Figure 2.1 shows a multiplier model, where the national output is a function of the consumption, investments, government spending, and net exports in an economy. When the credit crunch occurs, loans become less available or less affordable which curbs down people’s consumption through credit that is offered by banks and other financial institutions. The reduction in the consumption does not reduce the national output by the face value of the amount, but the amount multiplied by a multiplier.
The multiplier in the economy is determined by dividing 1 by the marginal propensity to consume (for every given dollar, how much goes to be spent) (Samuelson and Nordhaus 2004, 496). When the marginal propensity to consume is not present in our analysis due to insufficient data, we know for sure that the effect of this decrease in consumption due to less availability of credit has a multiplier effect to the economy.
Decreasing the consumption function is one, but there is another function that is affected by this financial crisis; the investment function of the economy is also affected. The availability of loans from banks has become tightened in such a way that either the cost of capital increases which makes loans more expensive or the requirements for loan applications have become more stringent. ...Download file to see next pagesRead More
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