 Disposable is your net income Your save or spend that income  Marginal Propensity to Consume (MPC) Is the increase in consumer spending when disposable.

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 Disposable is your net income Your save or spend that income  Marginal Propensity to Consume (MPC) Is the increase in consumer spending when disposable income rises by $1 Calculated by consumer spending/ Disposable income.

 Marginal Propensity to Save (MPS) Is the increase in household savings when disposable income rises by $1 savings/ disposable income  You can only spend or save that additional dollar so MPC + MPS = 1

 Assumptions Changes in overall spending lead to changes in Aggregate output. Interest rates are fixed Exports and imports are all zero.

Consumption function (C) Shows how a household’s consumer spending varies with the households current disposable income (YD) Autonomous consumer spending (A) the amount a household would spend it current income was 0. What will change Autonomous Consumer spending Changes in expected Future YD Changes in Aggregate wealth Aggregate consumer spending Real GDP C = A + MPC x YD Slope of the C function Is your MPC.

 Investment (I) Business plan to spending which includes unsold Items. OR Inventory  Change in Autonomous Investment expenditure It is how much a business (I) is going to change their Planned Expenditure initially Aggregate planned Investment expenditure Real GDP I I Planned I planned ‘

AE = Aggregate Planned exp. Slope of AE = MPC = rise/run Of AGG expenditure model. Real GDP = Y or income AE = aggregate planned expenditure = C+I planned C = consumption expenditure I = Planned investment expenditure C + I = C = A + (MPC x YD)

Planned aggregate spending can be different from Real GDP if there is unplanned Inventory Investment. Negative unplanned investment = smaller than expected inventories (produced to little) Consumers bought more than expected Positive unplanned investment = greater than expected inventories (produced to much)Consumers Firms can correct inventories issues by increasing or decreasing production. Which will eliminate unplanned inventories. So increase I Planned or Decrease I Planned to bring Inventories to equilibrium.

Real GDPYD= Disposable Income C = A+(MPC x YD) I PlannedAE plannedI unplanned MPC =.6

45 degree line all possible places Where planned aggregate spending is Equal to Real GDP AE planned 1K 2K 3K Real GDP Income and expenditure equilibrium Aggregate planned expenditure 3k 2.6k 2k 1.4k 1k At 1k of real GDP we have 1.4k AE planned 400 unplanned inventories AT 2k of real GDP we have 2k of AE Planned. 0 unplanned inventories At 3k of real GDP we have 2.6k of AE planned -400 unplanned inventories

 Aggregate Planned Expenditure is < Real GDP. National inventories are decreasing or negative unplanned inventories Autonomous (I) expenditure will increase  Aggregate Planned Expenditure > Real GDP National inventories are increasing or positive unplanned inventories. Autonomous (I) expenditure will decrease.

 A change in autonomous expenditure by business will cause Real GDP to increase multiple times due the multiplier  1/1-MPC or 1/MPS ex.  Autonomous Investment exp. increases 2million and MPC is.2: How much can GDP increase by?  $2million * 1/1-mpc = 2mm * 1/1-.2 = 2mm *1/.8 = 2mm *1.25=

 Government Expenditure (G) Governments Plan to spend according to a budget.  Change in Autonomous Government expenditure How much a Government is going to change their expenditure initially Aggregate Government Expenditure Real GDP G = Autonomous Government Exp. G’= Change Aut.Gov. Exp

45 degree line AE planned without government exp 1K 2K 3K Real GDP Income and expenditure equilibrium Aggregate planned expenditure 3k 2.6k 2k 1.4k 1k AE planned with government exp

 A change in autonomous expenditure by government will cause Real GDP to increase multiple times due the multiplier  1/1-MPC or 1/MPS ex.  Autonomous Investment exp. increases 2million and MPC is.2: How much can GDP increase by?  $2million * 1/1-mpc = 2mm * 1/1-.2 = 2mm *1/.8 = 2mm *1.25=  Tax Multiplier –MPC/MPS. EX.  MPC IS.6 TAXES INCREASES BY 100MM  -.6/.4 = X 100MM real GDP decreases by 150mm.  MPC IS.6 TAXES BY DECREASE BY 100MM  -.6/.4 = -1.5 X -100M REAL GDP WILL INCREASE BY 150MM