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micro economics chapter 10

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



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