Introduction:
The Aggregate Expenditure Model
The Basic Macroeconomic
Relationships
Why do we Learn the Aggregate
Expenditures Model
• We learn the aggregate expenditures model
so that we can better predict changes in the
business cycle and GDP.
• We can do this because in our model the
amount of goods and services produced
depends directly on the level of total
spending. They are equal.
Aggregate Expenditures and GDP
• Total Spending Must Equal Total Output at
Equilibrium GDP. Remember (G + C + Ig + Xn)
Total
Spending
GDP
Basic Tools of the Aggregate
Expenditure Model
Consumption Schedule
Savings Schedule
Investment Schedule
Savings and Consumption
• Personal Savings is the part of Disposable
Income that is not consumed.
Consumption
Savings
Disposable
Income
What Determines Consumption and
Savings?
• DI is the main determinant of both C and S.
Consumption Schedule
• Shows the direct consumption (C) to disposable
income (DI) relationship. C rises as DI rises.
• Households must spend a larger percentage if
their DI is low. More wealth = More Savings
• Break-Even Income is when C = DI
• This means that households consume their entire
income, but do not go in debt. Here, C intersects
the 45 degree line on the previous slide.
Saving Schedule
• Savings = Disposable Income – Consumption
• Dissaving is when you consume more than
your disposable income.
• You do this by either liquidating accumulated
wealth or borrowing money.
• We save a larger proportion of our disposable
income as it increases. This can cause a
snowball effect as more accumulated wealth
creates more DI.
Average Propensity to Consume
Average Propensity to Save
Average Propensity to Consume (APC): the total
percentage of DI consumed.
 APC = Consumption / Disposable Income
Average Propensity to Save (APS): the total
percentage of DI saved.
APS = Saving/ Disposable Income
APC
APS
1
Marginal Propensity to Consume
Marginal Propensity to Save
MPC (marginal propensity to consume): the change
in consumption divided by the change in income.
• Delta C / Delta DI
MPS (marginal propensity to save): the change in
savings divided by the change in income.
• Delta S / Delta DI
MPC
MPS
1
Test Preparation
• Numbers Two and Five on Pages 222 and 223
• Work in groups of four. After discussion and
consultation, have each member write down
the answer in their notebooks.