Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved ECON Designed by Amy McGuire, B-books, Ltd. McEachern CHAPTER Aggregate Expenditure Macro

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Disposable Income, Consumption, and Saving in the United States Exhibit 1

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved U.S. Consumption Depends on Disposable Income LO 1 Exhibit 2

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 The Consumption Function Exhibit Real disposable income (trillions of dollars) Real consumption (trillions of dollars) C The consumption function, C, shows the relationship between consumption and disposable income, other things constant.

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 Marginal Propensities to Consume and Save  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

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved LO 1 MPC, MPS, and the Slope of Consumption and Saving  MPC  The slope of the Consumption function  MPS  The slope of the Saving function

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Investment LO 2  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

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Rates of Return on Golf Carts and the Opportunity Cost of Funds 0 $2,000$4,000$6,000$8,000$10,000 Investment Nominal interest rate (percent) Market rate of interest Expected rate of return 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. LO 2 Exhibit 6

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Investment Demand Curve for the Economy 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. LO 2 Exhibit Investment (trillions of dollars) Nominal interest rate (percent) D

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Annual Percentage Change in U.S. Real GDP, Consumption, and Investment LO 2 Exhibit 9

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Government LO 3  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

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Net Exports LO 4  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

Chapter 9Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved Composition of Aggregate Expenditure LO 5  Consumption, C  Stable; long term trend: increase  Investment, I  Fluctuates  Government purchase, G  Long-term trend: declined  Net exports, X-M  Last decade: -4%