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BasicMacroeconomic
Relationships
9C H A P T E R
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9 - 2Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Income – Consumption andIncome – Saving Relationships•Personal Saving (S)•Consumption (C)•Disposable Income (DI)•S = DI - C•45-Degree Line•The Consumption Schedule•The Saving Schedule•Break-even Income
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9 - 3Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
CONSUMPTION AND SAVINGAPC Consumption / Income
APS Saving / Income
MPS Change in Saving Change in Income
MPC Change in Consumption Change in Income
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9 - 4Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C
S
Consumptionschedule
Savingschedule
C
S
Disposable Income
Disposable Income
SAVING
SAVING
DISSAVING
DISSAVING
MPC = Slope of C
MPS = Slope of S
MPC + MPS = 1
CONSUMPTION AND SAVING
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9 - 5Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
.80 .85 .90 .95 1.0
United States
Canada
United Kingdom
Netherlands
Germany
Italy
Japan
France
GLOBAL PERSPECTIVEAverage Propensities to Consume,Selected Nations, 2000
Statistical Abstract of the United States, 2002
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9 - 6Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
NONINCOME DETERMINANTSOF CONSUMPTION AND SAVING
•Wealth•Wealth Effects•Expectations•Real Interest Rates•Household Debt•Taxation
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9 - 7Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
• Terminology• Schedule Shifts• Stability
Graphically…
TERMINOLOGY, SHIFTS, & STABILITY
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9 - 8Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C0
S0
Disposable Income
Disposable Income
C1
S1
TERMINOLOGY, SHIFTS, & STABILITY
Increases inConsumptionMeans…
A DecreaseIn Saving
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9 - 9Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C0
S0
Disposable Income
Disposable Income
C2
S2
TERMINOLOGY, SHIFTS, & STABILITY
Decreases inConsumptionMeans…
An IncreaseIn Saving
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9 - 10Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Expected Rate of Return, r
Real Interest Rate, i
Inverse relationship betweenInvestment demand and theexpected rate of return
Interest Rate – InvestmentRelationship
Graphically presented...
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9 - 11Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow Investment (billions of dollars)
Ex
pe
cte
d r
ate
of
retu
rn,
r,a
nd
inte
res
t ra
te, i
(pe
rce
nts
) 16
14
12
10
8
6
4
2
0
INVESTMENTDEMAND
CURVE
5 10 15 20 25 30 35 40
I D
Interest Rate – InvestmentRelationship
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9 - 12Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
•Acquisition, Maintenance, and Operating Costs•Business Taxes•Technological Change•Stock of Capital Goods on Hand•Expectations
SHIFTS IN INVESTMENT DEMAND
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9 - 13Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
GLOBAL PERSPECTIVEGross Investment Expenditures as a Percentage of GDP, Selected Nations
30%
20%
10%
0%GermanyFranceUnited
StatesCanadaMexico United
KingdomSwedenJapanSouth
Korea
Source: World Bank
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9 - 14Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
•Durability•Irregularity of
Innovation•Variability of Profits•Variability of
Expectations
INSTABILITY OF INVESTMENT
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9 - 15Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
INVESTMENT DEMAND & SCHEDULE
Exp
ecte
d r
ate
of
retu
rn,
r, a
nd
real
in
tere
st r
ate,
i (
per
cen
ts)
Inve
stm
ent
(bil
lio
ns
of
do
lla
rs)
Investment(billions of dollars)
20
8
20
Real Domestic Product, GDP(billions of dollars)
I D
Ig
InvestmentDemandCurve
InvestmentSchedule
20
20
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9 - 16Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
EQUILIBRIUM GDP
GDP = C + Ig
Real Domestic OutputAggregate Expenditures ScheduleEquilibrium GDP
Saving and Planned Investment are Equal•Leakage•Injection
No Unplanned Changes in Inventories
Actual Investment
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9 - 17Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Pri
vate
sp
end
ing
, C +
I g
(bill
ion
s o
f d
olla
rs)
o45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
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9 - 18Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Pri
vate
sp
end
ing
, C +
I g
(bill
ion
s o
f d
olla
rs)
o45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
Say’s Law
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9 - 19Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Pri
vate
sp
end
ing
, C +
I g
(bill
ion
s o
f d
olla
rs)
o45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
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9 - 21Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Change inGDP = Multiplier x initial change
in spending
Multiplier = or 1
MPS
1
1 - MPC
THE MULTIPLIER EFFECT
Inverse relationship between: Multiplier & MPS
Multiplier Effect and the Marginal Propensities
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9 - 22Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THE MULTIPLIER EFFECT
.9
.8
.75
.67
.5
10
5
4
3
2
MPC Multiplier
MPC and the Multiplier
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• 45-degree line• consumption schedule• saving schedule• break-even income• average propensity to consume (APC)• average propensity to save (APS)• marginal propensity to consume (MPC)• marginal propensity to save (MPS)• wealth effect• expected rate of return• investment demand curve• multiplier
Copyright McGraw-Hill/Irwin, 2005ENDBACK
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9 - 24Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Next...The
Aggregate ExpendituresModel
Chapter 10