1. Warm-Up Why did boom towns rise in the Old West?
What happened to them over time?
What is the formula for GDP?

2. Income and Expenditure
Chapter 27: Income and Expenditure (pages )

3. What is GDP?
GDP = C + G + I + (X-M)

4. MPC + MPS = 1 Consumer Consumption
Consumers have disposable income (Yd)
Can either spend or save it
MARGINAL PROPENSITY TO CONSUME
MARGINAL PROPENSITY TO SAVE
MPC + MPS = 1

5. Consumption Schedule $13,000 $0 --- $14,000 $13,800 $200 0.8 0.2Yd
Consumption (C)
Savings
(S)
MPC
(DC/DYd)
MPS
(DS/DYd)
$13,000 $0
---
$14,000
$13,800
$200
0.8
0.2
$15,000
$14,500
$500
0.7
0.3
$16,000
$15,100
$900
0.6
0.4
$17,000
$15,600
$1,400
0.5

6. One person’s spending becomes another person’s income…
The Multiplier…
One person’s spending becomes another person’s income…

7. The Multiplier…
Consumption grows when MPC > 0
Multiplier =

8. Consumption Grows…
Person
MPC
Spends
Receives
Andrew
0.8
$1000
Lilly
$800
Marsha
$640
Pat
$512
Sundreana
$409.60
Alex
$1,000 led to $2, in additional spending (and more if we kept going)!!

9. Work Together to Answer These…
Would the multiplier be larger or smaller if you saved more of your additional income?
What is the multiplier if MPC = 0.67?
How much will GDP change if consumer spending increases by $100 billion (assume MPC = 0.6)?

10. Multiplier in Real Life…

11. Causes of Change in Consumption
Change in future disposable income
Spending  w/ expected  in Yd
Opposite if you expect to earn less
Change in aggregate wealth
 in wealth =  in consumption

12. Investment Spending & GDP

14. Investment Spending Impacted by: Interest rate Expected real GDP
Current production capacity

15. Expected Interest Rates
Decision to spend balances additional sales with cost of borrowing
EXAMPLE: To build a factory or not…
Expected return = 5%
Interest rate = 7%
What if interest = 3%
Build or not?

16. Expected Change in GDP  in real GDP =  in output
Investment spending helps meet expected output
Faster GDP  =  investment spending

17. Production Capacity Production capacity = possible output
Excess capacity = output < maximum
Excess capacity =  investment spending
EXAMPLE: 100,000 unit capacity
If demand = 50,000 then …
What if demand was 125,000 …