Download Chapter 9 - Building the Aggregate Expenditures Model

Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
9
C HAPTE R
Basic
Macroeconomic
Relationships
Key Terms
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9-1
Copyright McGraw-Hill/Irwin, 2005
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Key Terms
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Income – Consumption and
Income – Saving Relationships
•Personal Saving (S)
•Consumption (C)
•Disposable Income (DI)
•S = DI - C
•45-Degree Line
•The Consumption Schedule
•The Saving Schedule
•Break-even Income
Copyright McGraw-Hill/Irwin, 2005
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Key Terms
CONSUMPTION AND SAVING
APC
Consumption / Income
APS
Saving / Income
MPC
Change in Consumption
Change in Income
MPS
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Change in Saving
Change in Income
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CONSUMPTION AND SAVING
SAVING
Consumption
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
C
Consumption
schedule
C
Shifts in Investment
Demand
Investment Demand
and Schedule
DISSAVING
o
Instability of
Investment
45
MPC = Slope of C
o
Disposable Income
Multiplier
End
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Saving
Key Terms
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DISSAVING
9-4
MPC + MPS = 1
Saving
schedule
MPS = Slope of S
S
SAVING
o
S
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Disposable Income
GLOBAL PERSPECTIVE
Income –
Consumption and
Income – Saving
Relationships
Average Propensities to Consume,
Selected Nations, 2000
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
.80
.85
.90
.95
1.0
United States
Canada
United Kingdom
Netherlands
Germany
Instability of
Investment
Multiplier
Italy
Key Terms
Japan
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France
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Statistical Abstract of the United States, 2002
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Key Terms
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NONINCOME DETERMINANTS
OF CONSUMPTION AND SAVING
•Wealth
•Wealth Effects
•Expectations
•Real Interest Rates
•Household Debt
•Taxation
Copyright McGraw-Hill/Irwin, 2005
TERMINOLOGY, SHIFTS, & STABILITY
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
• Terminology
• Schedule Shifts
• Stability
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Graphically…
Multiplier
Key Terms
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TERMINOLOGY, SHIFTS, & STABILITY
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
C1
C0
Consumption
Income –
Consumption and
Income – Saving
Relationships
Increases in
Consumption
Means…
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
o
45
o
Disposable Income
Instability of
Investment
Key Terms
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Saving
Multiplier
A Decrease
S0
S1 In Saving
o
Disposable Income
End
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9-8
Copyright McGraw-Hill/Irwin, 2005
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Consumption
TERMINOLOGY, SHIFTS, & STABILITY
C0
C2
Decreases in
Consumption
Means…
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
o
45
o
Disposable Income
Instability of
Investment
Key Terms
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Saving
Multiplier
S2 An Increase
S0
In Saving
o
Disposable Income
End
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9-9
Copyright McGraw-Hill/Irwin, 2005
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Interest Rate – Investment
Relationship
Expected Rate of Return,
Real Interest Rate,
r
i
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Key Terms
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Inverse relationship between
Investment demand and the
expected rate of return
Graphically presented...
Copyright McGraw-Hill/Irwin, 2005
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Key Terms
and interest rate, i (percents)
Nonincome
Determinants of
Consumption and
Saving
r,
Consumption and
Saving
16
Expected rate of return,
Income –
Consumption and
Income – Saving
Relationships
Interest Rate – Investment
Relationship
14
INVESTMENT
DEMAND
CURVE
12
10
8
6
4
2
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ID
0
5
10
15
20
25
30
35
40
Investment (billions of dollars)
Copyright McGraw-Hill/Irwin, 2005
SHIFTS IN INVESTMENT DEMAND
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Key Terms
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•Acquisition,
Maintenance, and
Operating Costs
•Business Taxes
•Technological Change
•Stock of Capital Goods
on Hand
•Expectations
Copyright McGraw-Hill/Irwin, 2005
GLOBAL PERSPECTIVE
Gross Investment Expenditures as a
Percentage of GDP, Selected Nations
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
30%
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
20%
Investment Demand
and Schedule
Instability of
Investment
10%
Multiplier
Key Terms
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0%
South
Korea
Japan Mexico United France Germany Canada Sweden United
States
Kingdom
Copyright McGraw-Hill/Irwin, 2005
Source: World Bank
INSTABILITY OF INVESTMENT
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Key Terms
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•Durability
•Irregularity of
Innovation
•Variability of Profits
•Variability of
Expectations
Copyright McGraw-Hill/Irwin, 2005
THE MULTIPLIER EFFECT
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Multiplier
Change in Real GDP
= Initial Change in Spending
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Change
in GDP
Key Terms
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= Multiplier x
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initial change
in spending
For Example…
Copyright McGraw-Hill/Irwin, 2005
THE MULTIPLIER EFFECT
Income –
Consumption and
Income – Saving
Relationships
(2)
(3)
Change in
Change in
(1)
Saving
Change in Consumption
Income (MPC = .75) (MPS = .25)
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Increase in
Investment of $5
$ 5.00
$ 3.75
$ 1.25
Second Round
3.75
2.81
.94
Third Round
2.81
2.11
.70
Fourth Round
2.11
1.58
.53
Key Terms
Fifth Round
1.58
1.19
.39
4.75
3.56
1.19
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All Other
Rounds
$20.00
$15.00
$ 5.00
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier
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Total
Copyright McGraw-Hill/Irwin, 2005
THE MULTIPLIER EFFECT
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
Multiplier Effect and the
Marginal Propensities
Inverse relationship between:
Multiplier & MPS
Multiplier
Multiplier
=
1
1
or 1 - MPC
MPS
Key Terms
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Change in
GDP
= Multiplier x
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initial change
in spending
THE MULTIPLIER EFFECT
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Investment Demand
and Schedule
Instability of
Investment
MPC and the Multiplier
MPC
Multiplier
.9
10
.8
5
.75
Multiplier
4
Key Terms
.67
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.5
3
2
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•
•
•
•
•
•
•
•
•
•
•
•
45-degree line
consumption schedule
saving schedule
break-even income
average propensity to consume (APC)
average propensity to save (APS)
marginal propensity to consume (MPC)
marginal propensity to save (MPS)
wealth effect
expected rate of return
investment demand curve
multiplier
Copyright McGraw-Hill/Irwin, 2005
BACK
END
Income –
Consumption and
Income – Saving
Relationships
Consumption and
Saving
Nonincome
Determinants of
Consumption and
Saving
Terminology, Shifts,
and Stability
Investment
Shifts in Investment
Demand
Next...
The
Aggregate Expenditures
Model
Investment Demand
and Schedule
Instability of
Investment
Multiplier
Key Terms
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Chapter 10
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