2. BASIC MACROECONOMIC RELATIONSHIPS Pertemuan 6 Matakuliah: J0594-Teori Ekonomi Tahun: 2009

3. Bina Nusantara University 3 Basic Relationships Income-Consumption Income-Saving 45° Line C = DI on the Line S = DI - C

4. Bina Nusantara University 4 Consumption and Saving The Consumption Schedule The Saving Schedule Break-Even Income Average Propensity to Consume (APC) Average Propensity to Save (APS) APS = Saving Income APC = Consumption Income

5. Bina Nusantara University 5 Consumption and Saving Marginal Propensity to Consume (MPC) Marginal Propensity to Save (MPS) MPC = Change in Consumption Change in Income MPS = Change in Saving Change in Income

6. Bina Nusantara University 6 Consumption and Saving (1) Level of Output And Income (GDP=DI) (2) Consump- tion (C) (3) Saving (S) (1-2) (4) Average Propensity to Consume (APC) (2)/(1) (5) Average Propensity to Save (APS) (3)/(1) (6) Marginal Propensity to Consume (MPC) Δ(2)/Δ(1) (7) Marginal Propensity to Save (MPS) Δ(3)/Δ(1) (1)$370 (2) 390 (3) 410 (4) 430 (5) 450 (6) 470 (7) 490 (8) 510 (9) 530 (10) 550 $375 390 405 420 435 450 465 480 495 510 $-5 0 5 10 15 20 25 30 35 40 1.01 1.00.99.98.97.96.95.94.93 -.01.00.01.02.03.04.05.06.07.75.25

7. Bina Nusantara University 7 500 475 450 425 400 375 45° Consumption and Saving 50 25 0 370390 410 430 450 470 490 510 530 550 Consumption and Saving Schedules C S Consumption Schedule Saving Schedule Saving $5 Billion Dissaving $5 Billion Dissaving $5 Billion Saving $5 Billion Disposable Income (billions of dollars) Consumption (billions of dollars) Saving (billions of dollars)

8. Bina Nusantara University 8 GLOBAL PERSPECTIVE Consumption and Saving Source: Statistical Abstract of the United States, 2006 Average Propensities to Consume Select Nations GDPs United States Canada United Kingdom Japan Germany Netherlands Italy France.80.85.90.95 1.00.963.958.953.942.896.893.840.833 Average Propensities to Consume

9. Bina Nusantara University 9 Consumption and Saving MPC + MPS = 1 MPC and MPS as Slopes Nonincome Determinants of Consumption and Saving –Wealth Effect –Expectations –Real Interest Rates –Household Debt

10. Bina Nusantara University 10 Consumption and Saving Other Important Considerations Changes Along Schedules Switch to Real GDP Schedule Shifts Stability Taxation

11. Bina Nusantara University 11 Interest Rate and Investment Expected Rate of Return (r) The Real Interest Rate (i) Meaning of r = i Investment Demand Curve

12. Bina Nusantara University 12 Interest Rate and Investment Expected Rate of Return (r) Cumulative Amount of Investment Having This Rate of Return or Higher (i) 16% 14% 12% 10% 8% 6% 4% 2% 0% $ 0 5 10 15 20 25 30 35 40 r and i (percent) 16 14 12 10 8 6 4 2 0 5 10 15 20 25 30 35 40 Investment (billions of dollars) The Investment Demand Curve ID

13. Bina Nusantara University 13 Interest Rate and Investment Shifts of the Investment Demand Curve –Acquisition, Maintenance, and Operating Costs –Business Taxes –Technological Change –Stock of Capital Goods on Hand –Expectations

14. Bina Nusantara University 14 Interest Rate and Investment r and i (percent) 0 Investment (billions of dollars) Shifts in the Investment Demand Curve ID 0 ID 1 ID 2 Increase in Investment Demand Decrease in Investment Demand

15. Bina Nusantara University 15 Interest Rate and Investment Instability of Investment –Durability –Irregularity of Innovation –Variability of Profits –Variability of Expectations

16. Bina Nusantara University 16 The Multiplier Effect Multiplier = Change in Real GDP Initial Change in Spending The Multiplier and the Marginal Propensities Multiplier = 1 1 - MPC Multiplier = 1 MPS -or- Graphically… W 8.2

17. Bina Nusantara University 17 The Multiplier Effect (1) Change in Income (2) Change in Consumption (MPC =.75) (3) Change in Saving (MPC =.25) Increase in Investment of $5 Second Round Third Round Fourth Round Fifth Round All other rounds Total $ 5.00 3.75 2.81 2.11 1.58 4.75 $ 20.00 $ 3.75 2.81 2.11 1.58 1.19 3.56 $ 15.00 $ 1.25.94.70.53.39 1.19 $ 5.00 Tabular and Graphical Views Rounds of Spending 12345All $20.00 15.25 13.67 11.56 8.75 5.00 $5.00 $3.75 $2.81 $2.11 $1.58 $4.75 ΔI= $5 billion

18. Bina Nusantara University 18 The Multiplier Effect The MPC and the Multiplier 10 5 4 3 2.5.67.75.8.9 MPCMultiplier