Chapter 27: Basic Macroeconomic Relationships
Income Consumption and Saving Consumption and saving Primarily determined by DI Direct relationship Consumption schedule Planned household spending (in our model) Saving schedule DI minus C Dissaving can occur
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Basic Macroeconomic Relationships27McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Income Consumption and SavingConsumption and savingPrimarily determined by DIDirect relationshipConsumption schedulePlanned household spending (in our model)Saving scheduleDI minus CDissaving can occurLO127-*Income Consumption and SavingLO127-*Consumption and Saving Schedules390 410 430 450 470 490 510 530 550CSConsumptionscheduleSaving scheduleSaving $5 billionDissaving $5 billionDissaving$5 billionSaving $5 billionConsumption (billions of dollars)Saving(billions of dollars)Disposable income (billions of dollars)LO127-*Average PropensitiesAverage propensity to consume (APC)Fraction of total income consumedAverage propensity to save (APS)Fraction of total income savedAPC =APS =consumptionincomeincomesavingAPC + APS = 1LO127-*Marginal PropensitiesMarginal propensity to consume (MPC)Proportion of a change in income consumedMarginal propensity to save (MPS)Proportion of a change in income savedMPC =MPS =change in consumptionchange in incomechange in incomechange in savingMPC + MPS = 1LO127-*Nonincome DeterminantsAmount of disposable income is the main determinantOther determinantsWealthBorrowingExpectationsReal interest ratesLO227-*Interest-Rate-InvestmentExpected rate of returnThe real interest rateInvestment demand curveLO327-*Investment Demand CurveID(r) and (i)Investment(billions of dollars) 16%$ 014 512 1010 15 8 20 6 25 4 30 2 35 0 40InvestmentdemandcurveLO327-*Shifts of Investment DemandAcquisition, maintenance, and operating costsBusiness taxesTechnological changeStock of capital goods on handPlanned inventory changesExpectationsLO427-*Shifts of Investment Demand Expected rate of return, r, andreal interest rate, i (percents)0Investment (billions of dollars)ID0ID1ID2Increasein investmentdemandDecrease in investmentdemandLO427-*Global PerspectiveLO427-*The Multiplier EffectA change in spending changes real GDP more than the initial change in spendingMultiplier =change in real GDPinitial change in spendingChange in GDP = multiplier x initial change in spendingLO527-*Multiplier and Marginal PropensitiesMultiplier and MPC directly relatedLarge MPC results in larger increases in spendingMultiplier and MPS inversely relatedLarge MPS results in smaller increases in spendingMultiplier =11- MPCMultiplier =1MPSLO527-*
