2. 9 - 1 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Building the Aggregate Expenditures Model 9 C H A P T E R

3. 9 - 2 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show PRIVATE CLOSED ECONOMY Simplifications... A Closed Economy Defer Government & Taxes Defer Exports and Imports All Saving Is Personal Net Income Abroad Is Zero Aggregate Spending = Consumption and Investment

4. 9 - 3 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Saving (S) = Disposable Income (DI) - Consumption (C) Households consume most of their disposable income Consumption & saving are directly related to income Consumption Schedule Saving Schedule Breakeven Income CONSUMPTION AND SAVING

5. 9 - 4 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Consumption Saving o o 45 o C S Consumption schedule Saving schedule C S Disposable Income SAVING DISSAVING MPC = Slope of C MPS = Slope of S MPC + MPS = 1 CONSUMPTION AND SAVING

6. 9 - 5 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show CONSUMPTION AND SAVING APC Consumption / Disposable Income APS Saving / Disposable Income MPS Change in Saving Change in Disposable Income MPC Change in Consumption Change in Disposable Income

7. 9 - 6 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show.80.85.90.951.0.986.976.972.940.907.873.869.842 Canada United States Netherlands United Kingdom Germany Italy Japan France GLOBAL PERSPECTIVE Average Propensities to Consume, Selected Nations, 1999 Statistical Abstract of the United States, 2000

8. 9 - 7 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show NONINCOME DETERMINANTS OF CONSUMPTION AND SAVING Wealth Wealth Effects Expectations Taxation Household Debt

9. 9 - 8 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Terminology Schedule Shifts Stability Graphically… TERMINOLOGY, SHIFTS, & STABILITY

10. 9 - 9 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Consumption Saving o o 45 o C0C0 S0S0 Disposable Income C1C1 S1S1 TERMINOLOGY, SHIFTS, & STABILITY Increases in Consumption Means… A Decrease In Saving

11. 9 - 10 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Consumption Saving o o 45 o C0C0 S0S0 Disposable Income C2C2 S2S2 TERMINOLOGY, SHIFTS, & STABILITY Decreases in Consumption Means… An Increase In Saving

12. 9 - 11 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Expected Rate of Return, r Real Interest Rate, i Inverse relationship between Investment demand and the expected rate of return INVESTMENT Graphically presented...

13. 9 - 12 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Investment (billions of dollars) Expected rate of return, r, and interest rate, i (percents) 16 14 12 10 8 6 4 2 0 INVESTMENT DEMAND CURVE 5 10 15 20 25 30 35 40 INVESTMENT I D

14. 9 - 13 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Acquisition, Maintenance, and Operating Costs Business Taxes Technological Change Stock of Capital Goods on Hand Expectations SHIFTS IN INVESTMENT DEMAND

15. 9 - 14 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show GLOBAL PERSPECTIVE Gross Investment Expenditures as a Percentage of GDP, Selected Nations 40% 30% 20% 10% 0% GermanyFranceUnited States CanadaMexicoUnited Kingdom SwedenJapanSouth Korea Source: World Bank

16. 9 - 15 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show INVESTMENT DEMAND & SCHEDULE Expected rate of return, r, and real interest rate, i (percents) Investment (billions of dollars) Investment (billions of dollars) 20 8 Real Domestic Product, GDP (billions of dollars) I D IgIg Investment Demand Curve Investment Schedule 20

17. 9 - 16 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Durability of Capital and Variability of Expectations Irregularity of Innovation Volatility of Investment INSTABILITY OF INVESTMENT

18. 9 - 17 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show EQUILIBRIUM GDP GDP = C + I g Real Domestic Output Aggregate Expenditures Schedule Equilibrium GDP Saving and Planned Investment are Equal Leakage Injection No Unplanned Changes in Inventories Actual Investment

19. 9 - 18 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Private spending, C + I g (billions of dollars) o 45 o C C + I g I g = $20 Billion Equilibrium Real domestic product, GDP (billions of dollars) 370 390 410 430 450 470 490 510 530 550 (C + I g = GDP) EQUILIBRIUM GDP C =$450 Billion $530 510 490 470 450 430 410 390 370

20. 9 - 19 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Private spending, C + I g (billions of dollars) o 45 o C C + I g I g = $20 Billion Equilibrium Real domestic product, GDP (billions of dollars) 370 390 410 430 450 470 490 510 530 550 (C + I g = GDP) EQUILIBRIUM GDP C =$450 Billion $530 510 490 470 450 430 410 390 370 Say’s Law

21. 9 - 20 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Private spending, C + I g (billions of dollars) o 45 o C C + I g I g = $20 Billion Equilibrium Real domestic product, GDP (billions of dollars) 370 390 410 430 450 470 490 510 530 550 (C + I g = GDP) EQUILIBRIUM GDP C =$450 Billion $530 510 490 470 450 430 410 390 370 Chapter Conclusions

22. consumption schedule saving schedule break-even income average propensity to consume (APC)average propensity to consume (APC) average propensity to save (APS)average propensity to save (APS) marginal propensity to consume (MPC)marginal propensity to consume (MPC) marginal propensity to save (MPS)marginal propensity to save (MPS) wealth effect expected rate of return real interest rate investment demand curve planned investment investment schedule aggregate expenditures scheduleaggregate expenditures schedule equilibrium GDP 45 degree line leakage injection unplanned changes in inventoriesunplanned changes in inventories actual investment Copyright McGraw-Hill/Irwin, 2002 ENDBACK

23. 9 - 22 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Investment Demand and Schedule Instability of Investment Equilibrium GDP Key Terms Previous Slide Next Slide End Show Next... Aggregate Expenditures The Multiplier, Net Exports, and Government Chapter 10