Basic Macroeconomic Relationships 9 C H A P T E R.

BasicMacroeconomic

Relationships

9C H A P T E R

9 - 2Copyright McGraw-Hill/Irwin, 2005

Income – Consumption andIncome – Saving Relationships

Consumption and Saving

Nonincome Determinants of Consumption and Saving

Terminology, Shifts, and Stability

Investment

Shifts in Investment Demand

Investment Demand and Schedule

Instability of Investment

Multiplier

Key Terms

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Income – Consumption andIncome – Saving Relationships•Personal Saving (S)•Consumption (C)•Disposable Income (DI)•S = DI - C•45-Degree Line•The Consumption Schedule•The Saving Schedule•Break-even Income






Investment




Multiplier

Key Terms

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CONSUMPTION AND SAVINGAPC Consumption / Income

APS Saving / Income

MPS Change in Saving Change in Income

MPC Change in Consumption Change in Income






Investment




Multiplier

Key Terms

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Co

nsu

mp

tio

nS

avin

g

o

o45

o

C

S

Consumptionschedule

Savingschedule

C

S

Disposable Income

Disposable Income

SAVING

SAVING

DISSAVING

DISSAVING

MPC = Slope of C

MPS = Slope of S

MPC + MPS = 1

CONSUMPTION AND SAVING






Investment




Multiplier

Key Terms

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.80 .85 .90 .95 1.0

United States

Canada

United Kingdom

Netherlands

Germany

Italy

Japan

France

GLOBAL PERSPECTIVEAverage Propensities to Consume,Selected Nations, 2000

Statistical Abstract of the United States, 2002






Investment




Multiplier

Key Terms

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NONINCOME DETERMINANTSOF CONSUMPTION AND SAVING

•Wealth•Wealth Effects•Expectations•Real Interest Rates•Household Debt•Taxation






Investment




Multiplier

Key Terms

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• Terminology• Schedule Shifts• Stability

Graphically…

TERMINOLOGY, SHIFTS, & STABILITY






Investment




Multiplier

Key Terms

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Co

nsu

mp

tio

nS

avin

g

o

o45

o

C0

S0

Disposable Income

Disposable Income

C1

S1


Increases inConsumptionMeans…

A DecreaseIn Saving






Investment




Multiplier

Key Terms

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Co

nsu

mp

tio

nS

avin

g

o

o45

o

C0

S0

Disposable Income

Disposable Income

C2

S2


Decreases inConsumptionMeans…

An IncreaseIn Saving






Investment




Multiplier

Key Terms

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Expected Rate of Return, r

Real Interest Rate, i

Inverse relationship betweenInvestment demand and theexpected rate of return

Interest Rate – InvestmentRelationship

Graphically presented...






Investment




Multiplier

Key Terms

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EndEndShowShow Investment (billions of dollars)

Ex

pe

cte

d r

ate

of

retu

rn,

r,a

nd

inte

res

t ra

te, i

(pe

rce

nts

) 16

14

12

10

8

6

4

2

0

INVESTMENTDEMAND

CURVE

5 10 15 20 25 30 35 40

I D

Interest Rate – InvestmentRelationship






Investment




Multiplier

Key Terms

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•Acquisition, Maintenance, and Operating Costs•Business Taxes•Technological Change•Stock of Capital Goods on Hand•Expectations

SHIFTS IN INVESTMENT DEMAND






Investment




Multiplier

Key Terms

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GLOBAL PERSPECTIVEGross Investment Expenditures as a Percentage of GDP, Selected Nations

30%

20%

10%

0%GermanyFranceUnited

StatesCanadaMexico United

KingdomSwedenJapanSouth

Korea

Source: World Bank






Investment




Multiplier

Key Terms

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•Durability•Irregularity of

Innovation•Variability of Profits•Variability of

Expectations

INSTABILITY OF INVESTMENT






Investment




Multiplier

Key Terms

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INVESTMENT DEMAND & SCHEDULE

Exp

ecte

d r

ate

of

retu

rn,

r, a

nd

real

in

tere

st r

ate,

i (

per

cen

ts)

Inve

stm

ent

(bil

lio

ns

of

do

lla

rs)

Investment(billions of dollars)

20

8

20

Real Domestic Product, GDP(billions of dollars)

I D

Ig

InvestmentDemandCurve

InvestmentSchedule

20

20






Investment




Multiplier

Key Terms

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EQUILIBRIUM GDP

GDP = C + Ig

Real Domestic OutputAggregate Expenditures ScheduleEquilibrium GDP

Saving and Planned Investment are Equal•Leakage•Injection

No Unplanned Changes in Inventories

Actual Investment






Investment




Multiplier

Key Terms

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Pri

vate

sp

end

ing

, C +

I g

(bill

ion

s o

f d

olla

rs)

o45

o

C

C + Ig

Ig = $20 Billion

Equilibrium

Real domestic product, GDP (billions of dollars)

370 390 410 430 450 470 490 510 530 550

(C + I g = GDP)

EQUILIBRIUM GDP

C =$450 Billion

$530

510

490

470

450

430

410

390

370






Investment




Multiplier

Key Terms

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Pri

vate

sp

end

ing

, C +

I g

(bill

ion

s o

f d

olla

rs)

o45

o

C

C + Ig

Ig = $20 Billion

Equilibrium


370 390 410 430 450 470 490 510 530 550

(C + I g = GDP)

EQUILIBRIUM GDP

C =$450 Billion

$530

510

490

470

450

430

410

390

370

Say’s Law






Investment




Multiplier

Key Terms

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Pri

vate

sp

end

ing

, C +

I g

(bill

ion

s o

f d

olla

rs)

o45

o

C

C + Ig

Ig = $20 Billion

Equilibrium


370 390 410 430 450 470 490 510 530 550

(C + I g = GDP)

EQUILIBRIUM GDP

C =$450 Billion

$530

510

490

470

450

430

410

390

370






Investment




Multiplier

Key Terms

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Change inGDP = Multiplier x initial change

in spending

Multiplier = or 1

MPS

1

1 - MPC

THE MULTIPLIER EFFECT

Inverse relationship between: Multiplier & MPS

Multiplier Effect and the Marginal Propensities






Investment




Multiplier

Key Terms

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THE MULTIPLIER EFFECT

.9

.8

.75

.67

.5

10

5

4

3

2

MPC Multiplier

MPC and the Multiplier

• 45-degree line• consumption schedule• saving schedule• break-even income• average propensity to consume (APC)• average propensity to save (APS)• marginal propensity to consume (MPC)• marginal propensity to save (MPS)• wealth effect• expected rate of return• investment demand curve• multiplier

Copyright McGraw-Hill/Irwin, 2005ENDBACK






Investment




Multiplier

Key Terms

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Next...The

Aggregate ExpendituresModel

Chapter 10

Basic Macroeconomic Relationships 9 C H A P T E R.

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