2. BASIC MACRO RELATIONSHIPS

3. DI= Consumption + Savings Factors that Determine C/S  DI  As DI declines---S declines  45 degree reference line  C=DI  Savings=amount by which actual C falls short of 45 degree line

5. 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. Non-Income Determinants of C & S 1. Wealth  Amount of all assets owned  Equity  Real assets vs. financial assets  Usually—if wealth increases  C moves up; S down

7. Non-Income Determinants of C & S 2. Expectations  Expect recession----  C decreases; S increases  Expect prices to rise tomorrow---  C increases; S decreases

8. Non-Income Determinants of C & S 3. Real interest rates  Adjusted for Inflation  i decreases then borrowing increases  i increases then borrowing decreases  If you borrow more---Consume more— save less  At low interest rates—less incentive to save—Why?

9. Non-Income Determinants of C & S 4. Household debt  As % of DI  Held constant when drawing C schedule  If consumers increase debt---increase C more at each level  BUT “No Free Lunch”  Short term- C increases  Long term- C decreases 5. Taxes  Shift both C and S

10. Consumption Saving o o 45 o C0C0 S0S0 Disposable Income C1C1 S1S1 TERMINOLOGY, SHIFTS, & STABILITY Increases in Consumption Means… A Decrease In Saving

11. Consumption Saving o o 45 o C0C0 S0S0 Disposable Income C2C2 S2S2 TERMINOLOGY, SHIFTS, & STABILITY Decreases in Consumption Means… An Increase In Saving