Income Consumption and Income Saving Relationships Consumption and

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Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier 9 CHAPTER Basic Macroeconomic Relationships Key Terms Previous Slide Next Slide End Show 9 -1 Copyright Mc. Graw-Hill/Irwin, 2005

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier Key Terms Previous Slide End Show 9 -2 Next Slide Income – Consumption and Income – 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 Copyright Mc. Graw-Hill/Irwin, 2005

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier Key Terms CONSUMPTION AND SAVING APC Consumption / Income APS Saving / Income MPC Change in Consumption Change in Income MPS Previous Slide End Show 9 -3 Next Slide Change in Saving Change in Income Copyright Mc. Graw-Hill/Irwin, 2005

CONSUMPTION AND SAVING Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts,

CONSUMPTION AND SAVING Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment SAVING Consumption Income – Consumption and Income – Saving Relationships C Consumption schedule C Shifts in Investment Demand and Schedule DISSAVING Instability of Investment o 45 MPC = Slope of C o Disposable Income Multiplier End Show Next Slide Saving Key Terms Previous Slide DISSAVING 9 -4 MPC + MPS = 1 Saving schedule MPS = Slope of S S o S Copyright Mc. Graw-Hill/Irwin, 2005 Disposable Income SAVING

GLOBAL PERSPECTIVE Income – Consumption and Income – Saving Relationships Average Propensities to Consume,

GLOBAL PERSPECTIVE Income – Consumption and Income – Saving Relationships Average Propensities to Consume, Selected Nations, 2000 Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule . 80 . 85 . 90 . 95 1. 0 United States Canada United Kingdom Netherlands Germany Instability of Investment Multiplier Italy Key Terms Japan Previous Slide Next Slide France End Show 9 -5 Copyright Mc. Graw-Hill/Irwin, 2005 Statistical Abstract of the United States, 2002

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier Key Terms Previous Slide End Show 9 -6 Next Slide NONINCOME DETERMINANTS OF CONSUMPTION AND SAVING • Wealth Effects • Expectations • Real Interest Rates • Household Debt • Taxation Copyright Mc. Graw-Hill/Irwin, 2005

TERMINOLOGY, SHIFTS, & STABILITY Income – Consumption and Income – Saving Relationships Consumption and

TERMINOLOGY, SHIFTS, & STABILITY Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment • Terminology • Schedule Shifts • Stability Shifts in Investment Demand and Schedule Instability of Investment Graphically… Multiplier Key Terms Previous Slide Next Slide End Show 9 -7 Copyright Mc. Graw-Hill/Irwin, 2005

TERMINOLOGY, SHIFTS, & STABILITY Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology,

TERMINOLOGY, SHIFTS, & STABILITY Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability C 1 C 0 Consumption Income – Consumption and Income – Saving Relationships Increases in Consumption Means… Investment Shifts in Investment Demand and Schedule o Instability of Investment 45 o Disposable Income Key Terms Previous Slide Next Slide Saving Multiplier A Decrease S 0 S 1 In Saving o Disposable Income End Show 9 -8 Copyright Mc. Graw-Hill/Irwin, 2005

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Consumption TERMINOLOGY, SHIFTS, & STABILITY C 0 C 2 Decreases in Consumption Means… Investment Shifts in Investment Demand and Schedule o Instability of Investment 45 o Key Terms Previous Slide Next Slide Saving Multiplier Disposable Income S 2 An Increase S 0 In Saving o Disposable Income End Show 9 -9 Copyright Mc. Graw-Hill/Irwin, 2005

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Interest Rate – Investment Relationship Expected Rate of Return, Real Interest Rate, r i Shifts in Investment Demand and Schedule Instability of Investment Multiplier Key Terms Previous Slide End Show 9 - 10 Next Slide Inverse relationship between Investment demand the expected rate of return Graphically presented. . . Copyright Mc. Graw-Hill/Irwin, 2005

Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment

Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier Key Terms and interest rate, i (percents) Nonincome Determinants of Consumption and Saving r, Consumption and Saving 16 Expected rate of return, Income – Consumption and Income – Saving Relationships Interest Rate – Investment Relationship 14 INVESTMENT DEMAND CURVE 12 10 8 6 4 2 Previous Slide End Show 9 - 11 Next Slide ID 0 5 10 15 20 25 30 35 40 Investment (billions of dollars) Copyright Mc. Graw-Hill/Irwin, 2005

SHIFTS IN INVESTMENT DEMAND Income – Consumption and Income – Saving Relationships Consumption and

SHIFTS IN INVESTMENT DEMAND Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier Key Terms Previous Slide End Show 9 - 12 Next Slide • Acquisition, Maintenance, and Operating Costs • Business Taxes • Technological Change • Stock of Capital Goods on Hand • Expectations Copyright Mc. Graw-Hill/Irwin, 2005

GLOBAL PERSPECTIVE Gross Investment Expenditures as a Percentage of GDP, Selected Nations Income –

GLOBAL PERSPECTIVE Gross Investment Expenditures as a Percentage of GDP, Selected Nations Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving 30% Terminology, Shifts, and Stability Investment Shifts in Investment Demand 20% Investment Demand Schedule Instability of Investment 10% Multiplier Key Terms Previous Slide End Show 9 - 13 Next Slide 0% South Korea Japan Mexico United France Germany Canada Sweden United States Kingdom Copyright Mc. Graw-Hill/Irwin, 2005 Source: World Bank

INSTABILITY OF INVESTMENT Income – Consumption and Income – Saving Relationships Consumption and Saving

INSTABILITY OF INVESTMENT Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier Key Terms Previous Slide End Show 9 - 14 Next Slide • Durability • Irregularity of Innovation • Variability of Profits • Variability of Expectations Copyright Mc. Graw-Hill/Irwin, 2005

THE MULTIPLIER EFFECT Income – Consumption and Income – Saving Relationships Consumption and Saving

THE MULTIPLIER EFFECT Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Multiplier Change in Real GDP = Initial Change in Spending Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier Change in GDP Key Terms Previous Slide End Show 9 - 15 = Multiplier x Next Slide initial change in spending For Example… Copyright Mc. Graw-Hill/Irwin, 2005

THE MULTIPLIER EFFECT Income – Consumption and Income – Saving Relationships (2) (3) Change

THE MULTIPLIER EFFECT Income – Consumption and Income – Saving Relationships (2) (3) Change in (1) Saving Change in Consumption (MPC =. 75) (MPS =. 25) Income Consumption and Saving Nonincome Determinants of Consumption and Saving Increase in Investment of $5 $ 5. 00 $ 3. 75 $ 1. 25 Second Round 3. 75 2. 81 . 94 Third Round 2. 81 2. 11 . 70 Fourth Round 2. 11 1. 58 . 53 Key Terms Fifth Round 1. 58 1. 19 . 39 Previous Slide All Other Rounds 4. 75 3. 56 1. 19 $20. 00 $15. 00 $ 5. 00 Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier End Show 9 - 16 Next Slide Total Copyright Mc. Graw-Hill/Irwin, 2005

THE MULTIPLIER EFFECT Income – Consumption and Income – Saving Relationships Consumption and Saving

THE MULTIPLIER EFFECT Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment Multiplier Effect and the Marginal Propensities Inverse relationship between: Multiplier & MPS Multiplier = Key Terms Previous Slide End Show 9 - 17 Next Slide Change in GDP 1 MPS or = Multiplier x Copyright Mc. Graw-Hill/Irwin, 2005 1 1 - MPC initial change in spending

THE MULTIPLIER EFFECT Income – Consumption and Income – Saving Relationships Consumption and Saving

THE MULTIPLIER EFFECT Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand and Schedule Instability of Investment MPC and the Multiplier MPC Multiplier . 9 10 . 8 5 . 75 Multiplier Key Terms 4 . 67 Previous Slide End Show 9 - 18 Next Slide . 5 3 2 Copyright Mc. Graw-Hill/Irwin, 2005

• • • 45 -degree line consumption schedule saving schedule break-even income average

• • • 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 Mc. Graw-Hill/Irwin, 2005 BACK END

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of

Income – Consumption and Income – Saving Relationships Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts, and Stability Investment Shifts in Investment Demand Next. . . The Aggregate Expenditures Model Investment Demand Schedule Instability of Investment Multiplier Key Terms Previous Slide End Show 9 - 20 Chapter 10 Next Slide Copyright Mc. Graw-Hill/Irwin, 2005

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