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Eco 200 – 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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eco 200 principles of macroeconomics

Eco 200 – Principles of Macroeconomics

Chapter 10:Aggregate Expenditures

consumption and saving
Consumption and Saving
  • Yd = C+S
  • S = Yd – C
  • C = a + bYd
  • a = intercept
  • b = slope

(= DC/DYd)

saving and dissaving
Saving and Dissaving
  • C > Yd: S < 0
  • C < Yd: S > 0
  • C = Yd: S = 0
mpc and mps
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

apc and aps
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
determinants of consumption
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
investment
Investment
  • Investment is autonomous (it is assumed that investment doesn’t change when real GDP changes)
determinants of investment
Determinants of investment
  • Investment spending is affected by:
  • the interest rate
  • profit expectations
  • technological change
  • cost of capital goods
  • capacity utilization
volatility of investment
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
net exports
Net Exports
  • Exports – assumed to be autonomous
  • Imports – increase with GDP
  • X – declines as GDP rises
slide18
MPI
  • Marginal propensity to import = change in imports that result from a one-dollar increase in income = Dimports / DY

MPI = ?

aggregate expenditures
Aggregate expenditures
  • AE = C + I + G + X
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