![Page 1: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/1.jpg)
Basic Macroeconomic Relationships
Chapter 9
![Page 2: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/2.jpg)
Chapter 9 Figure 9.1
![Page 3: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/3.jpg)
Average and Marginal Propensities to Consume and Save
Average Propensities
APC = C/DI APS = S/DI since DI = S + C APC + APS = 1
Marginal Propensities
MPC = ∆C/∆DI MPS = ∆S/∆DI Since DI = S + C ∆DI = ∆S + ∆C MPC + MPS = 1
![Page 4: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/4.jpg)
Chapter 9 Table 9.1
![Page 5: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/5.jpg)
Chapter 9 Figure 9.2
The Consumption and Saving Functions
![Page 6: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/6.jpg)
Consumption and Saving Functions I
Consumption function: C = CA + MPC(Y) Where
CA (intercept) = “Autonomous Consumption”
MPC (slope) = “Marginal Propensity to Consume” (also = 1 – MPS)
Y = GDP or “Disposable Income”
![Page 7: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/7.jpg)
Consumption and Saving Functions II
Saving function: S = S0 + MPS(Y) Where
S0 (intercept) = “Maximum Dissaving” = - CA
MPS (slope) = “Marginal Propensity to Save” (also = 1 – MPC)
Y = GDP or “Disposable Income”
![Page 8: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/8.jpg)
Consumption and Saving Functions III
Since CA = - S0 and MPS +MPC = 1
If the consumption function is C = 100 + .85Y The saving function must be S = -100 + .15Y
If the saving function is S = -125 + .3Y The consumption function must be C = 125 + .7Y
![Page 9: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/9.jpg)
Chapter 9 Figure 9.3
![Page 10: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/10.jpg)
Chapter 9 Figure 9.4(a)Shifting the Consumption
Schedule
![Page 11: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/11.jpg)
Chapter 9 Figure 9.4(b)
Shifting the Saving Schedule
![Page 12: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/12.jpg)
Chapter 9 Table 9.2The Investment Demand
Schedule
![Page 13: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/13.jpg)
Chapter 9 Figure 9.5
The Investment Demand Function
![Page 14: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/14.jpg)
Chapter 9 Figure 9.6
![Page 15: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/15.jpg)
What Shifts the Investment Demand Function?
Changes in the cost of acquiring capital equipment, maintaining capital equipment, or operating capital equipment e.g., changes in the price of gasoline
Changes in taxes on business e.g., accelerated depreciation
Technological Improvements How much capital equipment is already installed Producer Expectations
Overoptimistic during the expansionary phase of the business cycle
Frustrating efforts to slow down the economy Overpessimistic during the contractionary phase of
the business cycle Delaying recovery
![Page 16: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/16.jpg)
Chapter 9 Figure 9.7
Investment is highly volatile!
![Page 17: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/17.jpg)
Chapter 9 Table 9.3The AE multiplier
M = 1/(1- MPC) = 1/MPS
![Page 18: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/18.jpg)
The Multiplier Formula
First round, increase in Aggregate Expenditure = ∆AE0
This induces an increase in C, ∆C1 = (MPC)∆AE0
Which becomes the second round increase in income
Inducing a further increase in C, ∆C2 = (MPC)∆C1 = (MPC)2∆AE0
∆C3 = (MPC)∆C2 = (MPC)3∆AE0, etc.
![Page 19: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/19.jpg)
Derivation of the Multiplier
∆Y = ∆AE0 + ∆AE1 + ∆AE2 + ∆AE3 + … + ∆AEn + …
∆Y = ∆AE0 + (MPC)∆AE0 + (MPC)∆AE1 + (MPC)∆AE2 + … + ∆AEn + …
∆Y = ∆AE0 + (MPC)∆AE0 + (MPC)2∆AE0 + (MPC)3∆AE0 + … + (MPC)n∆AE0 + …
∆Y = (MPC)0∆AE0 + (MPC)1∆AE0 + (MPC)2∆AE0 + (MPC)3∆AE0 + … + (MPC)n∆AE0 + …
![Page 20: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/20.jpg)
Derivation of the Multiplier
∆Y = (MPC)0∆AE0 + (MPC)1∆AE0 + (MPC)2∆AE0 + (MPC)3∆AE0 + … + (MPC)n∆AE0 + …
∆Y = ∑i=0,∞(MPC)n∆AE0 = ∆AE0∑i=0,∞(MPC)n
for infinite convergent sums, m = ∆Y/∆AE = 1/(1 – MPC) = 1/MPS
MPC < 1 necessary for infinite sum to converge
![Page 21: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/21.jpg)
Chapter 9 Figure 9.8
![Page 22: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/22.jpg)
Chapter 9
Figure 9.9
How M varies with the MPC
![Page 23: Basic Macroeconomic Relationships Chapter 9. Chapter 9 Figure 9.1](https://reader030.vdocuments.us/reader030/viewer/2022032704/56649d575503460f94a36a43/html5/thumbnails/23.jpg)
The AE multiplier
M = 1/(1- MPC) = 1/MPS M = change in real GDP/change in
spending M = ∆GDP/∆AE = ∆Y/∆AE Change in AE can come from any
component of aggregate expenditure
AE = C + Ig + G + Xn