1. Basic Macroeconomic Relationships
Chapter 9

2. Chapter 9 Figure 9.1

3. Average and Marginal Propensities to Consume and Save
Average Propensities
APC = C/DI
APS = S/DI
since DI = S + C
APC + APS = 1
Marginal Propensities
MPC = ∆C/∆DI
MPS = ∆S/∆DI
Since DI = S + C
∆DI = ∆S + ∆C
MPC + MPS = 1

4. Chapter 9 Table 9.1

5. The Consumption and Saving Functions
Chapter 9 Figure 9.2
The Consumption and Saving Functions

6. Consumption and Saving Functions I
Consumption function:
C = CA + MPC(Y)
Where
CA (intercept) = “Autonomous Consumption”
MPC (slope) = “Marginal Propensity to Consume” (also = 1 – MPS)
Y = GDP or “Disposable Income”

7. Consumption and Saving Functions II
S = S0 + MPS(Y)
Where
S0 (intercept) = “Maximum Dissaving” = - CA
MPS (slope) = “Marginal Propensity to Save” (also = 1 – MPC)
Y = GDP or “Disposable Income”

8. Consumption and Saving Functions III
Since CA = - S0 and MPS +MPC = 1
If the consumption function is
C = Y
The saving function must be
S = Y
If the saving function is
S = Y
The consumption function must be
C = Y

9. Chapter 9 Figure 9.3

10. Shifting the Consumption Schedule
Chapter 9 Figure 9.4(a)
Shifting the Consumption Schedule

11. Shifting the Saving Schedule
Chapter 9 Figure 9.4(b)
Shifting the Saving Schedule

12. The Investment Demand Schedule
Chapter 9 Table 9.2
The Investment Demand Schedule

13. The Investment Demand Function
Chapter 9 Figure 9.5
The Investment Demand Function

14. Chapter 9 Figure 9.6

15. What Shifts the Investment Demand Function?
Changes in the cost of acquiring capital equipment, maintaining capital equipment, or operating capital equipment
e.g., changes in the price of gasoline
Changes in taxes on business
e.g., accelerated depreciation
Technological Improvements
How much capital equipment is already installed
Producer Expectations
Overoptimistic during the expansionary phase of the business cycle
Frustrating efforts to slow down the economy
Overpessimistic during the contractionary phase of the business cycle
Delaying recovery

16. Investment is highly volatile!
Chapter 9 Figure 9.7
Investment is highly volatile!

17. The AE multiplier M = 1/(1- MPC) = 1/MPS
Chapter 9 Table 9.3
The AE multiplier M = 1/(1- MPC) = 1/MPS

18. The Multiplier Formula
First round, increase in Aggregate Expenditure = ∆AE0
This induces an increase in C, ∆C1 = (MPC)∆AE0
Which becomes the second round increase in income
Inducing a further increase in C, ∆C2 = (MPC)∆C1 = (MPC)2∆AE0
∆C3 = (MPC)∆C2 = (MPC)3∆AE0, etc.

19. Derivation of the Multiplier
∆Y = ∆AE0 + ∆AE1 + ∆AE2 + ∆AE3 + … + ∆AEn + …
∆Y = ∆AE0 + (MPC)∆AE0 + (MPC)∆AE1 + (MPC)∆AE2 + … + ∆AEn + …
∆Y = ∆AE0 + (MPC)∆AE0 + (MPC)2∆AE0 + (MPC)3∆AE0 + … + (MPC)n∆AE0 + …
∆Y = (MPC)0∆AE0 + (MPC)1∆AE0 + (MPC)2∆AE0 + (MPC)3∆AE0 + … + (MPC)n∆AE0 + …

20. Derivation of the Multiplier
∆Y = (MPC)0∆AE0 + (MPC)1∆AE0 + (MPC)2∆AE0 + (MPC)3∆AE0 + … + (MPC)n∆AE0 + …
∆Y = ∑i=0,∞(MPC)n∆AE0 = ∆AE0∑i=0,∞(MPC)n
for infinite convergent sums,
m = ∆Y/∆AE = 1/(1 – MPC) = 1/MPS
MPC < 1 necessary for infinite sum to converge

21. Chapter 9 Figure 9.8

22. How M varies with the MPC
Chapter 9
Figure 9.9
How M varies with the MPC

23. The AE multiplier M = 1/(1- MPC) = 1/MPS
M = change in real GDP/change in spending
M = ∆GDP/∆AE = ∆Y/∆AE
Change in AE can come from any component of aggregate expenditure
AE = C + Ig + G + Xn