ModuleIncome and Expenditure
KRUGMAN'SMACROECONOMICS for AP*
16
Margaret Ray and David Anderson
What you will learnWhat you will learn
in thisin this ModuleModule::• 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)
• Marginal Propensity to Save (MPS)
MPC = ∆ Consumer Spending∆ Disposable Income
MPS = ∆ Saving∆ Disposable Income
MPC + MPS = 1
MPC = 1 - MPS
MPS = 1 - MPC
The Multiplier: An Informal The Multiplier: An Informal IntroductionIntroduction
• Autonomous Change in Aggregate Spending (AAS)
• Multiplier
∆Y = 1_________(1 - MPC) X ∆AAS
Multiplier = ∆Y_____∆AAS
= 1_________(1 - MPC)
The Multiplier: An Informal The Multiplier: An Informal IntroductionIntroduction
Current Disposable Income Current Disposable Income and Consumer Spendingand Consumer Spending
•Relationship between Disposable Income and Consumer Spending
•Consumption Function
•Autonomous Consumer Spending (A)
•Aggregate Consumption Function
• C = A + MPC X DI
Shifts of the Aggregate Shifts of the Aggregate Consumption FunctionConsumption Function
•Changes in Expected Future Disposable Income
•Permanent Income Hypothesis
•Changes in Aggregate Wealth
•Life-cycle Hypothesis
• Planned Investment
Investment SpendingInvestment Spending
The Interest Rate and The Interest Rate and Investment SpendingInvestment 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 Expected Future Real GDP, Production Capacity, and Investment SpendingCapacity, 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
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