BASIC MACRO RELATIONSHIPS
DI= Consumption + Savings
 Factors that Determine C/S
 DI
 As DI declines---S declines
 45 degree reference line
 C=DI
 Savings=amount by which actual C falls short of 45 degree line
CONSUMPTION AND SAVING
Consumption
SAVING
C
Consumption
schedule
C
DISSAVING
o
45
MPC = Slope of C
o
MPC + MPS = 1
Saving
Disposable Income
DISSAVING
Saving
schedule
MPS = Slope of S
S
SAVING
o
S
Disposable Income
Non-Income Determinants of C & S
1. Wealth
 Amount
of all assets owned
 Equity


Real assets vs. financial assets
Usually—if wealth increases

C moves up; S down
Non-Income Determinants of C & S
2. Expectations

Expect recession---

C decreases; S increases
Expect prices to rise tomorrow--
C increases; S decreases
Non-Income Determinants of C & S
3. Real interest rates

Adjusted for Inflation
i decreases then borrowing increases
 i increases then borrowing decreases
If you borrow more---Consume more—
save less
At low interest rates—less incentive to
save—Why?



Non-Income Determinants of C & S
4. Household debt




As % of DI
Held constant when drawing C schedule
If consumers increase debt---increase C more at
each level
BUT “No Free Lunch”
Short term- C increases
 Long term- C decreases

5. Taxes

Shift both C and S
TERMINOLOGY, SHIFTS, & STABILITY
Consumption
C1
C0
Increases in
Consumption
Means…
o
45
o
Saving
Disposable Income
A Decrease
S0
S1 In Saving
o
Disposable Income
Consumption
TERMINOLOGY, SHIFTS, & STABILITY
C0
C2
Decreases in
Consumption
Means…
o
45
o
Saving
Disposable Income
S2 An Increase
S0
In Saving
o
Disposable Income