Eco 200 – Principles of Macroeconomics Chapter 10:Aggregate Expenditures.

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Presentation transcript:

Eco 200 – Principles of Macroeconomics Chapter 10:Aggregate Expenditures

Consumption and Saving Y d = C+S S = Y d – C C = a + bY d a = intercept b = slope (=  C/  Y d )

Saving and Dissaving C > Y d : S < 0 C 0 C = Y d : S = 0

MPC and MPS MPC = marginal propensity to consume = additional consumption resulting from an additional dollar of disposable income MPC =  C/  Yd = slope of the consumption function (b in the example above) MPS = marginal propensity to save = additional saving resulting from an additional dollar of disposable income =  S/  Y d MPC + MPS = 1 C = a + bY d S = ? S = -a + (1-b) Y d

APC and APS Average propensity to consume (APC) = C / Y d Average propensity to save (APS) = S / Y d APC + APS = 1 When C > Y d, APC > 1, APS < 0 C = Y d, APC=1, APS = 0 C 0

Example: Consumption function YdYd CSAPCAPSMPCMPS

Example: Consumption function YdYd CSAPCAPSMPCMPS

Example: Consumption function YdYd CSAPCAPSMPCMPS

Example: Consumption function YdYd CSAPCAPSMPCMPS

Example: Consumption function YdYd CSAPCAPSMPCMPS

Example: Consumption function YdYd CSAPCAPSMPCMPS

Determinants of consumption The consumption function (as a function of real GDP) will shift due to changes in: taxes and transfer payments wealth expectations demographics

Investment Investment is autonomous (it is assumed that investment doesn’t change when real GDP changes)

Determinants of investment Investment spending is affected by: the interest rate profit expectations technological change cost of capital goods capacity utilization

Volatility of investment Investment is the most volatile component of aggregate expenditures as a result of: large fluctuations in interest rates sudden changes in expectations uneven rates of technological change changes in tax policy fluctuations in capacity utilization over the business cycle

Government spending autonomous

Net Exports Exports – assumed to be autonomous Imports – increase with GDP X – declines as GDP rises

MPI Marginal propensity to import = change in imports that result from a one-dollar increase in income =  imports /  Y YExportsImportsX MPI = ?

Aggregate expenditures AE = C + I + G + X