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