Student-Centered Learning. Module Income and Expenditure 16.

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Presentation transcript:

Student-Centered Learning

Module Income and Expenditure 16

What you will learn in this Module : The nature of the multiplier, which shows how initial changes in spending lead to further changes The meaning of the aggregate consumption function, which shows how current disposable income affects consumer spending How expected future income and aggregate wealth affect consumer spending The determinants of investment spending Why investment spending is considered a leading indicator of the future state of the economy

Marginal Propensity to Consume (MPC) Amount of consumer spending when disposable income rises by $1 Marginal Propensity to Save (MPS) amount of money that would be saved if Yd increases MPC = Change in consumption Disposable Income MPS = Change in Saving Disposable Income MPC + MPS = 1 MPC = 1 - MPS MPS = 1 - MPC The Multiplier: An Informal Introduction Yd=C+S

Consumption Consumption is a huge fraction (more than 2/3) of total spending in the economy. After a person pays his taxes, he is left with disposable income that can either be consumed or saved. Yd = C + S When a person gets more Yd, he will increase both C and S. The marginal propensity to consume MPC = (Δ Consumption/Δ Disposable Income). The MPC is the amount by which consumer spending rises if current disposable income rises by $1 and is the slope of the consumption function. The marginal propensity to save MPS = (Δ Saving/Δ Disposable Income). MPC + MPS = 1 Thus the MPC = (Δ C/Δ Yd) =.8 and The MPS = (Δ S/Δ Yd) =.20. So if this household receives $1 of additional Yd, they will consume 80 cents and save 20 cents of it.

Autonomous Change in Aggregate Spending (AAS) Multiplier: amount of change in AAS multiplied to determine extent of change tch?v=O_Oozju3RRIhttp:// tch?v=O_Oozju3RRI ∆Y = 1_________ (1 - MPC) X ∆AAS Multiplier = ∆Y_____ ∆AAS = 1_________ (1 - MPC) The Multiplier: An Informal Introduction $1 in spending in one area of the economy multiplies into more than $1 of spending throughout the economy

Current Disposable Income and Consumer Spending Relationship between Disposable Income and Consumer Spending Consumption Function Autonomous Consumer Spending (A) Aggregate Consumption Function C = A + MPC X DI y+consumption+functionhttps:// y+consumption+function

Shifts of the Aggregate Consumption Function Changes in Expected Future Disposable Income Changes in Aggregate Wealth

Planned Investment ?v=rEiLOB4FulYhttps:// ?v=rEiLOB4FulY ?v=72p6uw5y- Rw&index=114&list=PLAEA5E 9ACA1508F92https:// ?v=72p6uw5y- Rw&index=114&list=PLAEA5E 9ACA1508F92 Investment Spending

The Interest Rate and Investment Spending A decrease in the real interest rate will result in more gross private investment r r’ I I’

eve Expected Future Real GDP, Production Capacity, and Investment Spending An increase in either expected future real GDP or production capacity will result in more investment at the same interest rate r I I’