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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 rateOther 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 9.2The 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 spendingOR change in real GDP = Multiplier*initial change in spending
Chapter 9 Table 9.3The 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 + Ig + G + Xn
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?
