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Eco 200 – Principles of
Macroeconomics
Chapter 10:Aggregate Expenditures
Consumption and Saving
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Yd = C+S
S = Yd – C
C = a + bYd
a = intercept
b = slope
(= DC/DYd)
Saving and Dissaving
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C > Yd: S < 0
C < Yd: S > 0
C = Yd: S = 0
MPC and MPS
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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
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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
Yd
C
0
40
100
120
200
200
300
280
400
360
500
440
S
APC
APS
MPC
MPS
Example: Consumption
function
Yd
C
S
0
40
-40
100
120
-20
200
200
0
300
280
20
400
360
40
500
440
60
APC
APS
MPC
MPS
Example: Consumption
function
Yd
C
S
APC
0
40
-40
-
100
120
-20
1.20
200
200
0
1.00
300
280
20
0.93
400
360
40
0.90
500
440
60
0.88
APS
MPC
MPS
Example: Consumption
function
Yd
C
S
APC
APS
0
40
-40
-
-
100
120
-20
1.20
-0.20
200
200
0
1.00
0.00
300
280
20
0.93
0.07
400
360
40
0.90
0.10
500
440
60
0.88
0.12
MPC
MPS
Example: Consumption
function
Yd
C
S
APC
APS
MPC
0
40
-40
-
-
-
100
120
-20
1.20
-0.20
0.8
200
200
0
1.00
0.00
0.8
300
280
20
0.93
0.07
0.8
400
360
40
0.90
0.10
0.8
500
440
60
0.88
0.12
0.8
MPS
Example: Consumption
function
Yd
C
S
APC
APS
MPC
MPS
0
40
-40
-
-
-
-
100
120
-20
1.20
-0.20
0.8
0.2
200
200
0
1.00
0.00
0.8
0.2
300
280
20
0.93
0.07
0.8
0.2
400
360
40
0.90
0.10
0.8
0.2
500
440
60
0.88
0.12
0.8
0.2
Determinants of consumption
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The consumption function (as a
function of real GDP) will shift due to
changes in:
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taxes and transfer payments
wealth
expectations
demographics
Investment
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Investment is autonomous (it is
assumed that investment doesn’t
change when real GDP changes)
Determinants of investment
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Investment spending is affected by:
the interest rate
profit expectations
technological change
cost of capital goods
capacity utilization
Volatility of investment
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Investment is the most volatile component of
aggregate expenditures as a result of:
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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
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autonomous
Net Exports
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Exports – assumed to be autonomous
Imports – increase with GDP
X – declines as GDP rises
MPI
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Marginal propensity to import = change
in imports that result from a one-dollar
increase in income = Dimports / DY
Y
Exports
Imports
X
0
20
0
20
100
20
10
10
200
20
20
0
300
20
30
-10
MPI = ?
Aggregate expenditures
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AE = C + I + G + X
AE
AE
45-degree line
45-degree line
C+I+G
C+I
C
Y
C+I+G
C+I+G+X
Y