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Module 16 Income and Expenditure Use a Picture of a retiree here KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson What you will learn in this Module: • The nature of the multiplier, which shows how initial changes in spending lead to further changes • The meaning of the aggregate consumption function, which shows how current disposable income affects consumer spending • How expected future income and aggregate wealth affect consumer spending • The determinants of investment spending • Why investment spending is considered a leading indicator of the future state of the economy The Multiplier: An Informal Introduction • Marginal Propensity to Consume (MPC) MPC = ∆ Consumer Spending ∆ Disposable Income MPS = • Marginal Propensity to Save (MPS) ∆ Saving ∆ Disposable Income MPC + MPS = 1 MPC = 1 - MPS MPS = 1 - MPC The Multiplier: An Informal Introduction • Autonomous Change in Aggregate Spending (AAS) • Multiplier 1 ∆Y = _________ X ∆AAS (1 - MPC) Multiplier = _____ ∆Y = _________ 1 ∆AAS (1 - MPC) Current Disposable Income and Consumer Spending •Relationship between Disposable Income and Consumer Spending •Consumption Function •Autonomous Consumer Spending (A) •Aggregate Consumption Function • C = A + MPC X DI Shifts of the Aggregate Consumption Function •Changes in Expected Future Disposable Income • Permanent Income Hypothesis •Changes in Aggregate Wealth • Life-cycle Hypothesis Investment Spending • Planned Investment The Interest Rate and Investment Spending r r’ I A decrease in the real interest rate will result in more gross private investment I’ eve Expected Future Real GDP, Production Capacity, and Investment Spending r I An increase in either expected future real GDP or production capacity will result in more investment at the same interest rate I’