Eco 200 – Principles of Macroeconomics

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# Eco 200 – Principles of Macroeconomics - PowerPoint PPT Presentation

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 &gt; Y d : S &lt; 0 C &lt; Y d : S &gt; 0 C = Y d : S = 0. MPC and MPS.

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### Eco 200 – Principles of Macroeconomics

Chapter 10:Aggregate Expenditures

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

(= DC/DYd)

Saving and Dissaving
• C > Yd: S < 0
• C < Yd: S > 0
• C = Yd: S = 0
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
• 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
• The consumption function (as a function of real GDP) will shift due to changes in:
• taxes and transfer payments
• wealth
• expectations
• demographics
Investment
• Investment is autonomous (it is assumed that investment doesn’t change when real GDP changes)
Determinants of investment
• Investment spending is affected by:
• the interest rate
• profit expectations
• technological change
• cost of capital goods
• capacity utilization
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
• Exports – assumed to be autonomous
• Imports – increase with GDP
• X – declines as GDP rises
MPI
• Marginal propensity to import = change in imports that result from a one-dollar increase in income = Dimports / DY

MPI = ?

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