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Chapter 8: Basic Macroeconomic Relationships
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The Consumption Schedule:What is the consumption-disposable income relationship?
higher income --- > higher consumption
The Saving Schedule:What is the income-saving relationship?
Higher income --- > Higher saving
Define Saving
Disposable income not consumed
S = DI - C
Savings = Disposable income - consumption
Define Disposable Income
After tax income
Define Break-Even Income
Income level at which households consume all income and save none of it.
Describe the Consumption/Disposable Income Schedule
45 degree line - consumption = disposable income
"c" line - consumption
Distance between 45 degree and C - savings
Define APC
Average Propensity to Consume:
Fraction/percentage of income that is consumed
APC = consumption/income
Define APS
Average Propensity to Save
Fraction/percentage of income that is saved
APS = saving/income
What is the relationship between APC and APS?
APC + APS = 1
Define MPC
Marginal Propensity to Consume
Fraction or percentage of the CHANGE in income that is spent
MPC = change in consumption/change in income
Define MPS
Fraction or percentage of CHANGE in income that is saved
MPS = change in saving/change in income
What is the relationship between MPC and MPS?
MPC + MPS = 1
Non-Income Determinants of Consumption and Saving:
1. Wealth
Wealth Effect:
Shifts consumption schedule upward and the saving schedule downward
Non-Income Determinants of Consumption and Saving:
2. Borrowing
Temporary higher consumption
Long run lower consumption
Non-Income Determinants of Consumption and Saving:
3. Expectations
a. Expectation of rising prices tomorrow = more spending and less saving today
b. Expectation of lower income in the future = less consumption and more saving today
Non-Income Determinants of Consumption and Saving:
4. Real Interest Rates
a. Low Interest Rates
Borrow more
Consume more
Save less
Shifts consumption schedule slightly upward
Shifts saving schedule slightly downward
b. High Interest Rates
Borrow less
Consume less
Save more
Shifts consumption schedule slightly downward
Shifts saving schedule slightly upward
Movement from one point to another on the consumption schedule:
Is caused by a CHANGE in DISPOSABLE INCOME
A shift of the entire consumption schedule:
Is caused by one of the four non-income determinants of consumption and saving:
Wealth
Borrowing
Expectations
Interest Rates
These four things shift the consumption schedule and saving schedule in opposite directions
Explain Taxation
Shifts the consumption schedule and saving schedule in the same direction
Explain Real Interest Rate
i = nominal rate - rate of inflation
What relationship does the Investment Demand Curve illustrate?
Inverse relationship between the real interest rate and the quantity of investment demanded
Explain shifts in the Investment Demand Curve
Increases in investment demand
: rightward shifts
Decreases in investment demand
: leftward shifts
Shifts in the Investment Demand Curve
1. Aquisition, Maintenance and Operating Costs
When costs fall, the expected rate of return rises, shifting the investment demand curve to the right
When costs rise, the curve shifts to the left
Shifts in the Investment Demand Curve
2. Business Taxes
An increase in business taxes lowers the profitability of the firm, shifting the investment demand curve to the left
A reduction of taxes shifts the curve to the right
Shifts in the Investment Demand Curve
3. Technological Change
A rapid rate of technological progress shifts the investment demand curve to the right
Shifts in the Investment Demand Curve
4. Stock of Capital Goods on Hand
Excess production capacity (overstocked)
: curve shifts leftward
Understocked
: investment demand curve shifts rightward
Shifts in the Investment Demand Curve
5. Planned Inventory
Plans to increase
: curve shifts right
Plans to decrease
: curve shifts left
Shifts in the Investment Demand Curve
6. Expectation
Positive expectations
: Right
Negative expectations
: Left
Define The Multiplier
The relationship between changes in GDP and changes in spending (expenditure)
MULTIPLIER = change in GDP / Change in Spending
Author
Anonymous
ID
146265
Card Set
Chapter 8: Basic Macroeconomic Relationships
Description
Chapter 8: Basic Macroeconomic Relationships
Updated
4/7/2012, 7:58:52 PM
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