the nation’s marginal propensity to consume 123. the marginal propensity to consume remains...

The Nation’s Marginal Propensity to Consume

123

The Marginal Propensity to Consume Remains Constant

The Consumption FunctionThe Consumption Function

Real Disposable Income

Rea

l Con

sum

ptio

n C

0

500Autonomous Consumption

TheTheConsumption Equation?Consumption Equation?TheTheConsumption Equation?Consumption Equation?

C = a + bY

Autonomous Consumption

MPCIncome

Induced Consumption

Calculate C for each level of National Income (Y)Calculate C for each level of National Income (Y)

Y Ca MPC C

100 50 0.50

200 60 0.60

300 70 0.70

400 80 0.80

500 90 0.90

C = a + bY = 100 +.5 (100) = 100= 50 +

100

180

280

400

540

C = a + bY = 60 + .60 (200) = 180C = a + bY = 70 + . 70 (300) = 280C = a + bY = 80 + .80 (400) = 400C = a + bY = 90 + .90 (500) = 540

6

What is Saving?What is Saving?What is Saving?What is Saving?That part of national

income not spent on consumption

If, Y = C + S

then, S = Y – C

7

What is the Marginal What is the Marginal Propensity to Save (MPS)?Propensity to Save (MPS)?What is the Marginal What is the Marginal Propensity to Save (MPS)?Propensity to Save (MPS)?

The Ratio of the change in saving to the change in income, which induced it.

Y

SMPS

Lets assume that your income increases by $100. We observe that you increase your consumption by $80. What is your MPC?

Y

CMPC

Y

SMPS

80.100

80

20.100

20

$60.

60.60

40.40

MPC + MPS = 1

MPC = 1– MPS

MPS = 1 – MPC

At each Y level, calculate the MPC, MPS and the SAt each Y level, calculate the MPC, MPS and the S

Y C MPC MPS S

0 60

100 140

200 220

300 300

400 380

500 460

Y

CMPC

80.100

80

MPC + MPS = 1

. 80 . 20 – 40

. 80 . 20 – 20

. 80 . 20 0

. 80 . 20 20

. 80 . 20 40

Y = C + S

– 60

45o

Y in million $ 100

100

90o

45o

100

0

100

150

150

150

Isosceles

$ in

mil

lion

C

Y

Y

S

0

0y*

y*

45o

$

$

13

What isWhat isIntended Investment?Intended Investment?What isWhat isIntended Investment?Intended Investment?

Investment spending that producers intend to undertake

14

Why do you say that investment Why do you say that investment is Autonomous?is Autonomous?Why do you say that investment Why do you say that investment is Autonomous?is Autonomous?

Because generally, Because generally, Investment is considered to Investment is considered to be independent of the level be independent of the level of incomeof income

When we say that Investment is When we say that Investment is autonomous, we mean that it is autonomous, we mean that it is autonomous to income.autonomous to income.

15

What determines Autonomous What determines Autonomous Investment?Investment?What determines Autonomous What determines Autonomous Investment?Investment?

Level of technology

17

What determines Autonomous What determines Autonomous Investment?Investment?What determines Autonomous What determines Autonomous Investment?Investment?

Interest rate

Level of technology

Bank Apartment

Packaging

RestaurantToy StoreCoffee Shop

12%15%

9%

20%

11%18

%

10%8%

19

What determines Autonomous What determines Autonomous Investment?Investment?What determines Autonomous What determines Autonomous Investment?Investment?

Expectations of growth Rate of capacity utilization

Level of technology Interest rate

The Effect of Changes in the Rate of Interest on the Level of Investment

128

45o

C+I i

C = a + byC,S

Y

I

22

Why is investment volatile?Why is investment volatile?Why is investment volatile?Why is investment volatile?

Because factors that influence investment sometimes change in unison to create dramatic increases or decreases in investment