How does marginal propensity effect consumption levels?

1. Consumption is expenditure by consumers and typically accounts for 65 percent of gross domestic product. 2. The consumption function is a direct relation that tells how much is consumed at each level of income. 3. The marginal propensity to consume is the amount that consumption changes when income changes by one dollar. 4. Saving is the part of income that is not spent for consumption or taxes. 5. The saving function is a direct relation that tells how much is saved at each level of income. 6. The marginal propensity to save is the amount that saving changes when income changes by one dollar. 7. Since each extra dollar is either spent or saved, the marginal propensity to consume plus the marginal propensity to save is equal to one. 8. Investment is the purchase of new capital by business and typically accounts for 15 percent of GDP. 9. The amount of investment depends on the interest rate. At high interest rates, a firm can choose between saving money at the high interest rate or using the money to buy capital goods. It will not buy the capital goods unless the capital good earns more than the firm can earn at the interest rate. The higher the interest rate, the fewer the capital goods which pay a return higher than the interest rate. As the interest rate falls, more and more capital goods will pay more than the interest rate and will be purchased. Thus there is an inverse relation between investment and the interest rate