1. Basic Macroeconomic Relationships27
Basic Macroeconomic Relationships
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. Income Consumption and Saving
Primarily determined by DI
Direct relationship
Consumption schedule
Planned household spending (in our model)
Saving schedule
DI minus C
Dissaving can occur
LO1
27-2

3. Income Consumption and Saving
LO1
27-3

4. Consumption and Saving Schedules
500
475
450
425
400
375
45° C
Saving $5 billion
Consumption
schedule
Consumption (billions of dollars)
Dissaving $5 billion 50 25
Dissaving
$5 billion
Saving schedule
(billions of dollars)
Saving S
Saving $5 billion
Disposable income (billions of dollars)
LO1
27-4

5. Average propensity to consume (APC) Fraction of total income consumed
Average Propensities
Average propensity to consume (APC)
Fraction of total income consumed
Average propensity to save (APS)
Fraction of total income saved
APC =
APS =
consumption
income
saving
APC + APS = 1
LO1
27-5

6. Marginal Propensities
Marginal propensity to consume (MPC)
Proportion of a change in income consumed
Marginal propensity to save (MPS)
Proportion of a change in income saved
MPC =
MPS =
change in consumption
change in income
change in saving
MPC + MPS = 1
LO1
27-6

7. Nonincome Determinants
Amount of disposable income is the main determinant
Other determinants
Wealth
Borrowing
Expectations
Real interest rates
LO2
27-7

8. Interest-Rate-Investment
Expected rate of return
The real interest rate
Investment demand curve
LO3
27-8

9. Investment Demand Curve
(billions
of dollars)
16%
$ 0 14 5 12 10 15 8 20 6 25 4 30 2 35 40
and real interest rate, i (percents)
Expected rate of return, r 16 14 12 10 8 6 4 2
Investment (billions of dollars)
Investment
demand
curve ID
LO3
27-9

10. Shifts of Investment Demand
Acquisition, maintenance, and operating costs
Business taxes
Technological change
Stock of capital goods on hand
Planned inventory changes
Expectations
LO4
27-10

11. Shifts of Investment Demand
Increase
in investment
demand
Expected rate of return, r, and
real interest rate, i (percents)
Decrease in
investment
demand
ID0
ID1
ID2
Investment (billions of dollars)
LO4
27-11

12. Global Perspective
LO4
27-12

13. The Multiplier Effect
A change in spending changes real GDP more than the initial change in spending
Multiplier =
change in real GDP
initial change in spending
Change in GDP = multiplier x initial change in spending
LO5
27-13

14. Multiplier and Marginal Propensities
Multiplier and MPC directly related
Large MPC results in larger increases in spending
Multiplier and MPS inversely related
Large MPS results in smaller increases in spending
Multiplier = 1
1- MPC
Multiplier = 1
MPS
LO5
27-14