What this lesson teaches
I can explain how a change in AD has a multiplied effect on national income.
Syllabus 9570, 3.1.2(e). Aggregate Demand and Aggregate Supply: How changes in the components of AD can have a multiplied effect on national income
Make a guess
Households feel more confident and spend more at every income level. Is this induced or autonomous consumption?
- Autonomous, as it did not come from income.
- Neither, because confidence is not economics.
- Induced, because people are now spending more.
Show the answer
Autonomous, as it did not come from income.
Induced spending changes with income. A rise in confidence raises spending at every income level, which is a change in autonomous consumption.
Autonomous spending does not depend on current income; induced spending rises and falls with income.
Autonomous spending does not depend on the current level of national income. Investment, government spending and exports are usually treated as autonomous. Some consumption is autonomous too: people spend on essentials even with no income, by drawing on savings.
Induced spending changes when income changes. Most consumption is induced: as income rises, people spend more.
Autonomous spending can still change, for other reasons. A rise in confidence raises consumption at every level of income.
In the multiplier process, a change in autonomous spending starts the chain, and induced consumption carries it through later rounds.
- Autonomous
- Does not depend on current income.
- Induced
- Changes with income.
Worked example: More income and more confidence
Suppose consumption is 20 plus 0.6 of income. Income rises from 100 to 110, and a rise in confidence raises the 20 to 25.
- Induced change: 0.6 x 10 = 6.
- Autonomous change: 25 - 20 = 5.
- New consumption: 25 + (0.6 x 110) = 91, up from 80.
- The rise of 11 comes from both sources.
Watch out for this
Autonomous spending never changes.
It does not depend on current income, but it can change for other reasons, such as confidence or interest rates.
Check your understanding
A pay rise lifts household incomes, and families spend some of it. In the same month, upbeat news makes them spend more whatever they earn. Which of the two is induced consumption?
- The extra spending out of the pay rise.
- Both, because each one raises household spending.
- The extra spending caused by the upbeat news.
Show the answer
The extra spending out of the pay rise.
Right. Induced consumption changes because income changes. It is a movement along the consumption line.