1. Eco 200 – Principles of Macroeconomics Chapter 10:Aggregate Expenditures

2. Consumption and Saving Y d = C+S S = Y d – C C = a + bY d a = intercept b = slope (=  C/  Y d )

3. Saving and Dissaving C > Y d : S < 0 C 0 C = Y d : S = 0

4. MPC and MPS MPC = marginal propensity to consume = additional consumption resulting from an additional dollar of disposable income MPC =  C/  Yd = slope of the consumption function (b in the example above) MPS = marginal propensity to save = additional saving resulting from an additional dollar of disposable income =  S/  Y d MPC + MPS = 1 C = a + bY d S = ? S = -a + (1-b) Y d

5. APC and APS Average propensity to consume (APC) = C / Y d Average propensity to save (APS) = S / Y d APC + APS = 1 When C > Y d, APC > 1, APS < 0 C = Y d, APC=1, APS = 0 C 0

6. Example: Consumption function YdYd CSAPCAPSMPCMPS 040 100120 200 300280 400360 500440

7. Example: Consumption function YdYd CSAPCAPSMPCMPS 040-40 100120-20 200 0 30028020 40036040 50044060

8. Example: Consumption function YdYd CSAPCAPSMPCMPS 040-40- 100120-201.20 200 01.00 300280200.93 400360400.90 500440600.88

9. Example: Consumption function YdYd CSAPCAPSMPCMPS 040-40-- 100120-201.20-0.20 200 01.000.00 300280200.930.07 400360400.900.10 500440600.880.12

10. Example: Consumption function YdYd CSAPCAPSMPCMPS 040-40--- 100120-201.20-0.200.8 200 01.000.000.8 300280200.930.070.8 400360400.900.100.8 500440600.880.120.8

11. Example: Consumption function YdYd CSAPCAPSMPCMPS 040-40---- 100120-201.20-0.200.80.2 200 01.000.000.80.2 300280200.930.070.80.2 400360400.900.100.80.2 500440600.880.120.80.2

12. Determinants of consumption The consumption function (as a function of real GDP) will shift due to changes in: taxes and transfer payments wealth expectations demographics

13. Investment Investment is autonomous (it is assumed that investment doesn’t change when real GDP changes)

14. Determinants of investment Investment spending is affected by: the interest rate profit expectations technological change cost of capital goods capacity utilization

15. Volatility of investment Investment is the most volatile component of aggregate expenditures as a result of: large fluctuations in interest rates sudden changes in expectations uneven rates of technological change changes in tax policy fluctuations in capacity utilization over the business cycle

16. Government spending autonomous

17. Net Exports Exports – assumed to be autonomous Imports – increase with GDP X – declines as GDP rises

18. MPI Marginal propensity to import = change in imports that result from a one-dollar increase in income =  imports /  Y YExportsImportsX 0200 1002010 20020 0 3002030-10 MPI = ?

19. Aggregate expenditures AE = C + I + G + X