Critical questions for understanding Applied Macroeconomics

Essay by jilliancpUniversity, Bachelor's February 2004

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Question #1:

Define and discuss consumption and its importance to the U.S. economy. What factors influence consumption? How does consumer confidence affect the level of Personal Consumption Expenditures? What is the current level of Personal Consumption Expenditures in the U.S.? . What is the current consumer confidence index? Do you believe that the consumer will continue to spend at levels shown in the recent past? Why or why not?

Consumption is, by definition, the goods and services purchased by consumers. These are divided into three subcategories, which are non-durable goods, durable goods, and services. The factors that influence the level of consumption collectively are described as the consumption function, which is the relationship between consumption and disposable income. The higher the disposable income the greater the consumption will be. Personal consumption expenditures are the official government measure of consumption expenditures undertaken by the household sector. It seeks to quantify that portion of gross domestic product that is purchased by the household sector and which is used, in theory at least, to satisfy wants and needs.

These expenditures purchase a wide range of goods and services, from hot fudge sundaes to sports cars, from stuffed animals to tacos, from health care to baseball tickets. Therefore, if the consumer has less or more confidence in the economic situation this will affect their decision to save or spend their disposable income. In the last quarter of 2003 the level of current personal consumption expenditures is 7426.6, a 6.9 percent change from the past.. The current consumer confidence index now stands at 96.8, up from 91.7 in December. I presume that the consumer will not continue to spend as in the recent past since it continues to rise. According to research the consumer optimism has been rising since mid-year of 2002. The expectations for...