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9 - 1Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
BasicMacroeconomic
Relationships
9C H A P T E R
9 - 2Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Income – Consumption andIncome – 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
9 - 3Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
CONSUMPTION AND SAVINGAPC Consumption / Income
APS Saving / Income
MPS Change in Saving Change in Income
MPC Change in Consumption Change in Income
9 - 4Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C
S
Consumptionschedule
Savingschedule
C
S
Disposable Income
Disposable Income
SAVING
SAVING
DISSAVING
DISSAVING
MPC = Slope of C
MPS = Slope of S
MPC + MPS = 1
CONSUMPTION AND SAVING
9 - 5Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
.80 .85 .90 .95 1.0
United States
Canada
United Kingdom
Netherlands
Germany
Italy
Japan
France
GLOBAL PERSPECTIVEAverage Propensities to Consume,Selected Nations, 2000
Statistical Abstract of the United States, 2002
9 - 6Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
NONINCOME DETERMINANTSOF CONSUMPTION AND SAVING
•Wealth•Wealth Effects•Expectations•Real Interest Rates•Household Debt•Taxation
9 - 7Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
• Terminology• Schedule Shifts• Stability
Graphically…
TERMINOLOGY, SHIFTS, & STABILITY
9 - 8Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C0
S0
Disposable Income
Disposable Income
C1
S1
TERMINOLOGY, SHIFTS, & STABILITY
Increases inConsumptionMeans…
A DecreaseIn Saving
9 - 9Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Co
nsu
mp
tio
nS
avin
g
o
o45
o
C0
S0
Disposable Income
Disposable Income
C2
S2
TERMINOLOGY, SHIFTS, & STABILITY
Decreases inConsumptionMeans…
An IncreaseIn Saving
9 - 10Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Expected Rate of Return, r
Real Interest Rate, i
Inverse relationship betweenInvestment demand and theexpected rate of return
Interest Rate – InvestmentRelationship
Graphically presented...
9 - 11Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow Investment (billions of dollars)
Ex
pe
cte
d r
ate
of
retu
rn,
r,a
nd
inte
res
t ra
te, i
(pe
rce
nts
) 16
14
12
10
8
6
4
2
0
INVESTMENTDEMAND
CURVE
5 10 15 20 25 30 35 40
I D
Interest Rate – InvestmentRelationship
9 - 12Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
•Acquisition, Maintenance, and Operating Costs•Business Taxes•Technological Change•Stock of Capital Goods on Hand•Expectations
SHIFTS IN INVESTMENT DEMAND
9 - 13Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
GLOBAL PERSPECTIVEGross Investment Expenditures as a Percentage of GDP, Selected Nations
30%
20%
10%
0%GermanyFranceUnited
StatesCanadaMexico United
KingdomSwedenJapanSouth
Korea
Source: World Bank
9 - 14Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
•Durability•Irregularity of
Innovation•Variability of Profits•Variability of
Expectations
INSTABILITY OF INVESTMENT
9 - 15Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Changein GDP =Multiplier x initial change
in spending
THE MULTIPLIER EFFECT
Multiplier =Change in Real GDP
Initial Change in Spending
For Example…
9 - 16Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THE MULTIPLIER EFFECT
Increase in Investment of $5
Second Round
Third Round
Fourth Round
Fifth Round
All Other Rounds
Total
(1)Change in
Income
(2)Change in
Consumption(MPC = .75)
(3)Change in
Saving(MPS = .25)
$ 5.00
3.75
2.81
2.11
1.58
4.75
$ 3.75
2.81
2.11
1.58
1.19
3.56
$ 1.25
.94
.70
.53
.39
1.19
$20.00 $15.00 $ 5.00
9 - 17Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Change inGDP = Multiplier x initial change
in spending
Multiplier = or 1
MPS
1
1 - MPC
THE MULTIPLIER EFFECT
Inverse relationship between: Multiplier & MPS
Multiplier Effect and the Marginal Propensities
9 - 18Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
THE MULTIPLIER EFFECT
.9
.8
.75
.67
.5
10
5
4
3
2
MPC Multiplier
MPC and the Multiplier
• 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 McGraw-Hill/Irwin, 2005ENDBACK
9 - 20Copyright McGraw-Hill/Irwin, 2005
Income – Consumption andIncome – Saving Relationships
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Multiplier
Key Terms
PreviousSlide
NextSlide
EndEndShowShow
Next...The
Aggregate ExpendituresModel
Chapter 10