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Chapter 9
Building the Aggregate (total)
Expenditures Model
Basic premise:
Aggregate expenditures or total
spending depend directly on the
amount of goods and services
produced
Employment levels rise to meet output
Employers will idle resources when
consumption is low
Consumption and Saving
Savings=DI minus C
Saving range-the area (shown
graphically) in which saving occurs
APC is a ratio of consumption to
disposable income C/DI
APS is a ratio of savings to disposable
income S/DI
APC + APS = 1
Dissaving-spending more than your DI
Done by borrowing or taking $ out of
savings that you have accumulated
over years
MPC- change in consumption
change in income
MPS- change in saving
change in income
Nominal vs. Real Interest Rates
Nominal-interest rates not adjusted for
inflation
Real-the nominal interest rate minus
the expected rate of inflation
The real rate of interest is important
when making investment decisions.
The opportunity cost of taking
money out of savings to invest in
capital equipment is what you
could earn if accruing interest.
Investment Demand Curve
The investment demand curve is an
array of potential investment projects
in descending order of their expected
rates of return.
The curve sloped downward reflecting
an inverse relationship between the
real interest rate (“price”) and the
quantity of investment demanded.
Leakage
Savings leaks -a withdrawal of
spending from the income-expenditure
model. Saving causes consumption to
be less than total output or GDP and
will not clear the shelves of inventory.
The excess inventory will hopefully be
sold as investment replacing the saving
leakage.