micro economics chapter 10
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10
Basic Macroeconomic
Relationships
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Income Consumption and Saving
• Consumption and saving
• Primarily determined by DI
• Direct relationship
• Consumption schedule
• Planned household spending at
•
LO1
differen
levels of DI
Saving schedule
• S = DI - C
• Planned household saving at each DI
Consumption and Saving
Schedules
TABLE 27.1 Consumption and Saving Schedules (in Billions) and Propensities to Consume and
Save
(4)
(1)
Level of
Output
and
Income
GDP=DI
(2)
Consumption
(C)
(3)
Saving
(S),
(1) – (2)
(1) $370
$375
(6)
(7)
Marginal
Propensity
to
Consume
(3)/(1)
(MPC),
(2)/(1)*
Marginal
Propensity
to Save
1.01
-.01
.75
.25
(5)
Average
Propensity
to
Consume
(APC),
Average
Propensity
to Save
(APS),
$-5
(2)/(1)
(MPS),
(3)/(1)*
(2)
390
390
0
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
Income, Consumption, and Saving
LO1
Average Propensities
• Average propensity to consume (APC)
• Fraction of total income consumed
• Average propensity to save (APS)
• Fraction of total income saved
consumption
APC =
income
APS =
APC + APS = 1
LO1
saving
income
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 =
change in consumption
change in income
MPS =
MPC + MPS = 1
LO1
change in saving
change in income
Interest Rate and Investment
• Expected rate of return
•
•
LO4
– Expected profit
Real interest rate
– Cost of investment
Invest as long as r ≥ i
Instability of Investment
• Variability of expectations
• Durability
• Irregularity of innovation
• Variability of profits
LO4
Volatility of Investment
LO4
