Introduction: The Aggregate Expenditure Model

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Presentation transcript:

Introduction: The Aggregate Expenditure Model The Basic Macroeconomic Relationships

Why do we Learn the Aggregate Expenditures Model We learn the aggregate expenditures model so that we can better predict changes in the business cycle and GDP. We can do this because in our model the amount of goods and services produced depends directly on the level of total spending. They are equal.

Aggregate Expenditures and GDP Total Spending Must Equal Total Output at Equilibrium GDP. Remember (G + C + Ig + Xn) Total Spending GDP

Basic Tools of the Aggregate Expenditure Model Consumption Schedule Savings Schedule Investment Schedule

Savings and Consumption Disposable Income Personal Savings is the part of Disposable Income that is not consumed.

What Determines Consumption and Savings? DI is the main determinant of both C and S.

Consumption Schedule Shows the direct consumption (C) to disposable income (DI) relationship. C rises as DI rises. Households must spend a larger percentage if their DI is low. More wealth = More Savings Break-Even Income is when C = DI This means that households consume their entire income, but do not go in debt. Here, C intersects the 45 degree line on the previous slide.

Saving Schedule Savings = Disposable Income – Consumption Dissaving is when you consume more than your disposable income. You do this by either liquidating accumulated wealth or borrowing money. We save a larger proportion of our disposable income as it increases. This can cause a snowball effect as more accumulated wealth creates more DI.

Average Propensity to Consume Average Propensity to Save Average Propensity to Consume (APC): the total percentage of DI consumed. APC = Consumption / Disposable Income Average Propensity to Save (APS): the total percentage of DI saved. APS = Saving/ Disposable Income APC APS 1

Marginal Propensity to Consume Marginal Propensity to Save MPC (marginal propensity to consume): the change in consumption divided by the change in income. Delta C / Delta DI MPS (marginal propensity to save): the change in savings divided by the change in income. Delta S / Delta DI MPC MPS 1

Test Preparation Numbers Two and Five on Pages 222 and 223 Work in groups of four. After discussion and consultation, have each member write down the answer in their notebooks.