Eco 200 principles of macroeconomics
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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

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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


Example consumption function

Example: Consumption function


Example consumption function1

Example: Consumption function


Example consumption function2

Example: Consumption function


Example consumption function3

Example: Consumption function


Example consumption function4

Example: Consumption function


Example consumption function5

Example: Consumption function


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


Government spending

Government spending

  • autonomous


Net exports

Net Exports

  • Exports – assumed to be autonomous

  • Imports – increase with GDP

  • X – declines as GDP rises


Eco 200 principles of macroeconomics

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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