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Principles of Macroeconomics

Principles of Macroeconomics. Chapter 10:Aggregate Expenditures. Consumption and Saving. Y d = C+S S = Y d – C C = a + bY d a = intercept b = slope (= D C/ D Y d ). Saving and Dissaving. C > Y d : S < 0 C < Y d : S > 0 C = Y d : S = 0. MPC and MPS.

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Principles of Macroeconomics

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  1. Principles of Macroeconomics Chapter 10:Aggregate Expenditures

  2. Consumption and Saving • Yd = C+S • S = Yd – C • C = a + bYd • a = intercept • b = slope (= DC/DYd)

  3. Saving and Dissaving • C > Yd: S < 0 • C < Yd: S > 0 • C = Yd: S = 0

  4. MPC and MPS • MPC = marginal propensity to consume = additional consumption resulting from an additional dollar of disposable income • MPC = DC/DYd = slope of the consumption function (b in the example above) • MPS = marginal propensity to save = additional saving resulting from an additional dollar of disposable income = DS/DYd • MPC + MPS = 1 • C = a + bYd • S = ? S = -a + (1-b) Yd

  5. APC and APS • Average propensity to consume (APC) = C / Yd • Average propensity to save (APS) = S / Yd • APC + APS = 1 • When C > Yd, APC > 1, APS < 0 • C = Yd, APC=1, APS = 0 • C < Yd, APC < 1, APS > 0

  6. Example: Consumption function

  7. Example: Consumption function

  8. Example: Consumption function

  9. Example: Consumption function

  10. Example: Consumption function

  11. Example: Consumption function

  12. Determinants of consumption • The consumption function (as a function of real GDP) will shift due to changes in: • taxes and transfer payments • wealth • expectations • demographics

  13. Investment • Investment is autonomous (it is assumed that investment doesn’t change when real GDP changes)

  14. Determinants of investment • Investment spending is affected by: • the interest rate • profit expectations • technological change • cost of capital goods • capacity utilization

  15. Volatility of investment • Investment is the most volatile component of aggregate expenditures as a result of: • large fluctuations in interest rates • sudden changes in expectations • uneven rates of technological change • changes in tax policy • fluctuations in capacity utilization over the business cycle

  16. Government spending • autonomous

  17. Net Exports • Exports – assumed to be autonomous • Imports – increase with GDP • X – declines as GDP rises

  18. MPI • Marginal propensity to import = change in imports that result from a one-dollar increase in income = Dimports / DY MPI = ?

  19. Aggregate expenditures • AE = C + I + G + X

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