1. Learning Objectives: Aggregate Expenditures LO1: Understand the marginal propensity to consume and how consumption, saving, and investment relate to national income LO2: Understand the concept of expenditures equilibrium LO3: Describe how small changes in spending have a large effect on national income CHAPTER 6 6-1© 2012 McGraw-Hill Ryerson Limited

2. Consumption Autonomous Spending the portion of total spending that is independent of the level of income Induced Spending the portion of spending that depends on the level of income 6-2© 2012 McGraw-Hill Ryerson Limited LO1

3. Table 6.1 Consumption and Savings Functions 6-3© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 30027525 40035050 50042575 600500100 700575125 800650150

4. Consumption Consumption function The relationship between income and consumption 6-4© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 Total consumption C = 50 +.75Y

5. Consumption Consumption function The relationship between income and consumption 6-5© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 Autonomous spending (when Y=0) C = 50 +.75Y

6. Consumption Consumption function The relationship between income and consumption 6-6© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 Induced spending (portion of increase in Y that is spent) C = 50 +.75Y > 75 > 100 > 75

7. Consumption Marginal Propensity to Consume the ratio of the change in consumption to the corresponding change in income 6-7© 2012 McGraw-Hill Ryerson Limited LO1 MPC = 75 / 100 = 0.75

8. Consumption Consumption function The relationship between income and consumption 6-8© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 MPC C = 50 +.75Y

9. Saving Saving function The relationship between income and saving 6-9© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 Total saving S = -50 +.25Y

10. Saving Saving function The relationship between income and saving 6-10© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 Autonomous dis-saving (when Y=0) S = -50 +.25Y

11. Saving Saving function The relationship between income and saving 6-11© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 Induced saving (portion of change in Y saved) S = -50 +.25Y > 25 > 100 > 25

12. Saving Marginal Propensity to Save the ratio of the change in saving to the corresponding change in income 6-12© 2012 McGraw-Hill Ryerson Limited LO1 MPS = 25 / 100 = 0.25

13. Saving Saving function The relationship between income and saving 6-13© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 50 –50 100125–25 200 0 MPS S = -50 +.25Y

14. Consumption and Saving Any income not consumed (C) is saved (S): It follows that: 6-14© 2012 McGraw-Hill Ryerson Limited LO1 C + S = Y MPC + MPS = 1

15. Chapter 6-15 Autonomous consumption Income (Y) C= 50 + 0.75Y C, S 50 0 100 200 300 400 500 -100 S= - 50 + 0.25Y 600 300 200 100 400 500 Rise = 150 Run = 200 Slope = MPC = = 0.75 150 200 Slope = MPS = = 0.25 50 200 Fig. 6.1 LO1 © 2012 McGraw-Hill Ryerson Limited Consumption and Saving Autonomous dis-saving

16. Self Test 1 Use the following graph to: 1. Calculate consumption and saving at Y = 0, 200, 400, 600, 800, 1000, and 1200. 6-16© 2012 McGraw-Hill Ryerson Limited LO1

17. Self Test 1 Use the following graph to: 1. Calculate consumption and saving at Y = 0, 200, 400, 600, 800, 1000, and 1200. 6-17© 2012 McGraw-Hill Ryerson Limited LO1 National Income (Y)Consumption (C)Saving (S) 0 200 400 600 800 1000 1200

18. Self Test 2 1.a) Complete the following table, assuming MPC is constant 2.What are the equations for the consumption and savings functions? 6-18© 2012 McGraw-Hill Ryerson Limited LO1 National IncomeConsumptionSaving 0 60 200220 400 20 600 60 800700