Macro
McEachern
2011
ECON
9
2010-
CHAPTER Aggregate
Designed by
Amy McGuire, B-books, Ltd.
Chapter 9
Expenditure
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
LO1 Disposable Income, Consumption, and
Exhibit 1
Saving in the United States
Chapter 9
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U.S. Consumption Depends on
Disposable Income
Exhibit 2
LO1
Chapter 9
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Exhibit 3
LO1
Real consumption (trillions of dollars)
The Consumption Function
C
11
10
9
8
7
6
5
4
3
2
1
The consumption function, C,
shows the relationship
between consumption and
disposable income, other
things constant.
0
1 2 3 4 5 6 7 8 9 10 11 121314
Real disposable income (trillions of dollars)
Chapter 9
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Marginal Propensities to Consume
and Save
LO1
Chapter 9
Marginal propensity to consume, MPC
Fraction of additional income that is
spent
Change in consumption / change in
income
Marginal propensity to save, MPS
Fraction of additional income that is
saved
Change in saving / change in income
MPC + MPS = 1
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
MPC, MPS, and the Slope of
Consumption and Saving
MPC
The slope of the Consumption function
MPS
The slope of the Saving function
LO1
Chapter 9
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Investment
Gross private domestic investment
New physical capital
New housing
Net increases to inventories
Firms purchase new capital
Expect higher return
Market interest rate
Opportunity cost of investing in
capital
LO2
Chapter 9
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
LO2
Exhibit 6
Nominal interest rate (percent)
Rates of Return on Golf Carts and
the Opportunity Cost of Funds
25
Expected rate
of return
20
15
10
8
5
Market rate
of interest
0
An individual firm invests in
any project with a rate of
return that exceeds the
market interest rate.
At an interest rate of 8%,
Hacker Haven purchases
three golf carts, investing
$6,000.
$2,000 $4,000 $6,000 $8,000 $10,000
Investment
Chapter 9
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LO2
Exhibit 7
Nominal interest rate (percent)
Investment Demand Curve for the
Economy
10
8
6
D
0
0.9 1.0 1.1
Chapter 9
The investment demand
curve for the economy sums
the investment demanded by
each firm at each interest rate.
At lower interest rates, more
investment projects become
profitable for individual firms,
so total investment in the
economy increases.
Investment
(trillions of dollars)
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Annual Percentage Change in U.S. Real
GDP, Consumption, and Investment
Exhibit 9
LO2
Chapter 9
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Government
Government outlays
Government purchases, G
Transfer payments, TP
Outright grants from government to
households
Vary inversely with income
Taxes, T
Vary directly with income
Net taxes = T – P
Autonomous of Income
LO3
Chapter 9
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Net Exports
Net exports = Exports – Imports
Income increases: imports increase
Autonomous of income
If M > X: Net exports < 0
If X > M: Net exports > 0
Nonincome determinants of net exports
Price level (U.S. and foreign)
Interest rates (U.S. and foreign)
Foreign income
Exchange rate
LO4
Chapter 9
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Composition of Aggregate
Expenditure
Consumption, C
Stable; long term trend: increase
Investment, I
Fluctuates
Government purchase, G
Long-term trend: declined
Net exports, X-M
Last decade: -4%
LO5
Chapter 9
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