Basic Macroeconomic Relationships

Chapter 9 Figure 9.1

Average and Marginal Propensities to Consume and Save  Average Propensities  APC = C/DI  APS = S/DI  since DI = S + C  APC + APS = 1  Marginal Propensities  MPC = ∆C/∆DI  MPS = ∆S/∆DI  Since DI = S + C  ∆DI = ∆S + ∆C  MPC + MPS = 1

Chapter 9 Table 9.1

Chapter 9 Figure 9.2 The Consumption and Saving Functions

Chapter 9 Figure 9.3

Nonincome determinants of consumption and saving  Wealth  Borrowing  Expectations  Real interest rate Other important considerations  Switching to real GDP  Change along schedule  Simultaneous shifts  taxation

Chapter 9 Figure 9.4(a) Shifting the Consumption Schedule

Chapter 9 Figure 9.4(b) Shifting the Saving Schedule

Chapter 9 Table 9.2 The Investment Demand Schedule

Chapter 9 Figure 9.5 The Investment Demand Function

Chapter 9 Figure 9.6

What Shifts the Investment Demand Function?  Acquisition maintenance and operating costs.  Changes in taxes on business  Technological Improvements  Stock of capital goods on hand  Planned inventory changes  Expectations  Instability of investment.

Chapter 9 Figure 9.7 Investment is highly volatile!

Multiplier effect  A change in spending, say investment ultimately changes output by more than initial change in investment spending. That surprising result is called multiplier effect. Multiplier = change in real GDP /initial change in spending OR change in real GDP = Multiplier*initial change in spending

Chapter 9 Table 9.3 The AE multiplier M = 1/(1- MPC) = 1/MPS

Chapter 9 Figure 9.8

Chapter 9 Figure 9.9 How M varies with the MPC

The AE multiplier  M = 1/(1- MPC) = 1/MPS  M = change in real GDP/change in spending  M = ∆GDP/∆AE = ∆Y/∆AE  Change in AE can come from any component of aggregate expenditure  AE = C + I g + G + X n

The multiplier and the marginal propensities  Multiplier = 1/1-MPC  As MPC+MPS=1  Multiplier = 1/MPS  If MPS= 0.25 then multiplier ?  If MPS= 0.2 then multiplier?  If MPS= 0.33 then multiplier?