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Macro McEachern 2011 ECON 9 2010- CHAPTER Aggregate Designed by Amy McGuire, B-books, Ltd. Chapter 9 Expenditure Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO1 Disposable Income, Consumption, and Exhibit 1 Saving in the United States Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved U.S. Consumption Depends on Disposable Income Exhibit 2 LO1 Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Exhibit 3 LO1 Real consumption (trillions of dollars) The Consumption Function C 11 10 9 8 7 6 5 4 3 2 1 The consumption function, C, shows the relationship between consumption and disposable income, other things constant. 0 1 2 3 4 5 6 7 8 9 10 11 121314 Real disposable income (trillions of dollars) Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Marginal Propensities to Consume and Save LO1 Chapter 9 Marginal propensity to consume, MPC Fraction of additional income that is spent Change in consumption / change in income Marginal propensity to save, MPS Fraction of additional income that is saved Change in saving / change in income MPC + MPS = 1 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved MPC, MPS, and the Slope of Consumption and Saving MPC The slope of the Consumption function MPS The slope of the Saving function LO1 Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Investment Gross private domestic investment New physical capital New housing Net increases to inventories Firms purchase new capital Expect higher return Market interest rate Opportunity cost of investing in capital LO2 Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO2 Exhibit 6 Nominal interest rate (percent) Rates of Return on Golf Carts and the Opportunity Cost of Funds 25 Expected rate of return 20 15 10 8 5 Market rate of interest 0 An individual firm invests in any project with a rate of return that exceeds the market interest rate. At an interest rate of 8%, Hacker Haven purchases three golf carts, investing $6,000. $2,000 $4,000 $6,000 $8,000 $10,000 Investment Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO2 Exhibit 7 Nominal interest rate (percent) Investment Demand Curve for the Economy 10 8 6 D 0 0.9 1.0 1.1 Chapter 9 The investment demand curve for the economy sums the investment demanded by each firm at each interest rate. At lower interest rates, more investment projects become profitable for individual firms, so total investment in the economy increases. Investment (trillions of dollars) Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Annual Percentage Change in U.S. Real GDP, Consumption, and Investment Exhibit 9 LO2 Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Government Government outlays Government purchases, G Transfer payments, TP Outright grants from government to households Vary inversely with income Taxes, T Vary directly with income Net taxes = T – P Autonomous of Income LO3 Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Net Exports Net exports = Exports – Imports Income increases: imports increase Autonomous of income If M > X: Net exports < 0 If X > M: Net exports > 0 Nonincome determinants of net exports Price level (U.S. and foreign) Interest rates (U.S. and foreign) Foreign income Exchange rate LO4 Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Composition of Aggregate Expenditure Consumption, C Stable; long term trend: increase Investment, I Fluctuates Government purchase, G Long-term trend: declined Net exports, X-M Last decade: -4% LO5 Chapter 9 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
