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Basic Macroeconomic Relationships 10 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Presentation on theme: "Basic Macroeconomic Relationships 10 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved."— Presentation transcript:

1 Basic Macroeconomic Relationships 10 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Income Consumption and Saving Consumption (C) and Saving (S) Primarily determined by Disposable Income (DI) Directly related to DI Saving = “not spending” LO1

3 Income, Consumption, and Saving LO1

4 Income Consumption and Saving Consumption schedule Planned household spending at different levels of DI Saving schedule S = DI - C Planned household saving at different levels of DI LO1

5 Consumption and Saving Schedules TABLE 10.1 Consumption and Saving Schedules (in Billions) and Propensities to Consume and Save (1) Level of Output and Income (GDP=DI) (2) Consumption (C) (3) Saving (S), (1) – (2) (4) Average Propensity to Consume (APC ), (2)/(1) (5) Average Propensity to Save (APS), (3)/(1) (6) Marginal Propensity to Consume (MPC),  (2)/  (1)* (7) Marginal Propensity to Save (MPS),  (3)/  (1)* (1) $370$375$-5 (dissaving) 1.01-.01.75.25 (2) 390 390 0 (break- even) 1.00.00.75.25 (3) 410 405 5.99.01.75.25 (4) 430 420 10.98.02.75.25 (5) 450 435 15.97.03.75.25 (6) 470 450 20.96.04.75.25 (7) 490 465 25.95.05.75.25 (8) 510 480 30.94.06.75.25 (9) 530 495 35.93.07.75.25 (10) 550 510 40.93.07.75.25 LO1

6 Consumption and Saving Schedules LO1 500 475 450 425 400 375 45° 50 25 0 370390 410 430 450 470 490 510 530 550 C S Consumption schedule Saving schedule Saving $5 billion Dissaving $5 billion Dissaving $5 billion Saving $5 billion Consumption (billions of dollars) Saving (billions of dollars) Disposable income (billions of dollars)

7 Average Propensities What is not consumed is saved 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

8 Consumption and Saving Schedules TABLE 10.1 Consumption and Saving Schedules (in Billions) and Propensities to Consume and Save (1) Level of Output and Income (GDP=DI) (2) Consumption (C) (3) Saving (S), (1) – (2) (4) Average Propensity to Consume (APC ), (2)/(1) (5) Average Propensity to Save (APS), (3)/(1) (6) Marginal Propensity to Consume (MPC),  (2)/  (1)* (7) Marginal Propensity to Save (MPS),  (3)/  (1)* (1) $370$375$-5 (dissaving) 1.01-.01.75.25 (2) 390 390 0 (break- even) 1.00.00.75.25 (3) 410 405 5.99.01.75.25 (4) 430 420 10.98.02.75.25 (5) 450 435 15.97.03.75.25 (6) 470 450 20.96.04.75.25 (7) 490 465 25.95.05.75.25 (8) 510 480 30.94.06.75.25 (9) 530 495 35.93.07.75.25 (10) 550 510 40.93.07.75.25 LO1

9 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

10 Consumption and Saving Schedules TABLE 10.1 Consumption and Saving Schedules (in Billions) and Propensities to Consume and Save (1) Level of Output and Income (GDP=DI) (2) Consumption (C) (3) Saving (S), (1) – (2) (4) Average Propensity to Consume (APC ), (2)/(1) (5) Average Propensity to Save (APS), (3)/(1) (6) Marginal Propensity to Consume (MPC),  (2)/  (1)* (7) Marginal Propensity to Save (MPS),  (3)/  (1)* (1) $370$375$-5 (dissaving) 1.01-.01.75.25 (2) 390 390 0 (break- even) 1.00.00.75.25 (3) 410 405 5.99.01.75.25 (4) 430 420 10.98.02.75.25 (5) 450 435 15.97.03.75.25 (6) 470 450 20.96.04.75.25 (7) 490 465 25.95.05.75.25 (8) 510 480 30.94.06.75.25 (9) 530 495 35.93.07.75.25 (10) 550 510 40.93.07.75.25 LO1

11 Marginal Propensities LO1 Disposable income Consumption Saving S C MPC = MPS = 15 20 =.75  C ($15)  DI ($20)  S ($5) 5 20 =.25 LO1

12 Interest Rate – Investment Relationship LO4

13 Investment Decision Marginal-benefit/Marginal-cost Decision Marginal-benefit from investment – = expected rate of return Marginal-cost – = interest rate paid on borrowed funds LO4

14 Interest Rate and Investment Guided by profit motive Expected rate of return (r) – = Expected profit / Cost Real interest rate (i) – Interest cost of investment = interest rate x $ borrowed Invest as long as r ≥ i LO4

15 Instability of Investment Variability of expectations Durability Irregularity of innovation Variability of profits LO4

16 Instability of Investment LO4

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