1.  Consumption and saving  Primarily determined by Disposable Income (DI)  Direct relationship  Consumption schedule (C)  Planned household spending (in our model)  Saving schedule (S)  DI minus C  Dissaving can occur ©2013 McGraw-Hill Ryerson Ltd.1Chapter 8, LO1

2. The line C, which generalizes the relationship between consumption and disposable income, indicates a direct relationship and shows that households consume most of their income. ©2013 McGraw-Hill Ryerson Ltd.2Chapter 8, LO1

3. APC= consumption income APS= saving income MPC= change in consumption change in income MPS= change in saving change in income APC + APS = 1 MPC + MPS = 1 ©2013 McGraw-Hill Ryerson Ltd.3Chapter 8, LO1

4. ©2013 McGraw-Hill Ryerson Ltd.4Chapter 8, LO1 (1) Level of Output and Income GDP=DI (2) Consumption (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),  (2)/  (1)* (7) Marginal Propensity to Save (MPS),  (3)/  (1)* (1) $370$375$-51.01-.01.75.25 (2) 390 390 01.00.00.75.25 (3) 410 405 5.99.01.75.25 (4) 430 420 10.98.02.75.25 (5) 450 435 15.97.03.75.25 (6) 470 450 20.96.04.75.25 (7) 490 465 25.95.05.75.25 (8) 510 480 30.94.06.75.25 (9) 530 495 35.93.07.75.25 (10) 550 510 40.93.07.75.25

5. 50 25 0 370390 410 430 450 470 490 510 530 550 C S Consumption schedule Saving schedule Saving $5 billion Dissaving $5 billion Dissaving $5 billion Saving $5 billion Consumption (billions of dollars) Saving (billions of dollars) Disposable income (billions of dollars) LO1 ©2013 McGraw-Hill Ryerson Ltd.5Chapter 8, LO1

6. Source: Organization for Economic Cooperation and Development, OECD, www.oecd.org. Derived from OECD household saving rates as percentages of disposable income. ©2013 McGraw-Hill Ryerson Ltd.6Chapter 8, LO1

7. Disposable income Consumption Saving S C MPC = MPS = 15 20 =.75  C ($15)  DI ($20)  S ($5) 5 20 =.25 LO1 ©2013 McGraw-Hill Ryerson Ltd.7Chapter 8, LO1

8.  Amount of disposable income is the main determinant  Other determinants  Wealth  Borrowing  Expectations  Real interest rates ©2013 McGraw-Hill Ryerson Ltd.8Chapter 8, LO1

9.  Switching to real GDP  Changes along schedules  Simultaneous shifts  Taxation  Stability ©2013 McGraw-Hill Ryerson Ltd.9Chapter 8, LO1

10. C0C0 S0S0 Real GDP (billions of dollars) Consumption (billions of dollars) Saving (billions of dollars) C2C2 C1C1 S1S1 S2S2 0 0 - + LO2 10-10 ©2013 McGraw-Hill Ryerson Ltd.10Chapter 8, LO1