Macroeconomic Relationships

Macroeconomic Relationships
A. Income-Consumption, Income-Saving
1. Saving = Disposable Income (DI) - Consumption (C)
2. As DI increases, savings increases (fig. 9.1)
3. Dissaving –consuming more than DI
4. Average Propensity to Consume (APC) (Table 9.1)
APC= Consumption
(% total of income consumed)
5. Average Propensity to Save (APS)
APS= Saving
(% total of income saved)
6. Marginal Propensity to Consume (MPC)
MPC= Δ in Consumption
Δ in Income
7. Marginal Propensity to Save (MPS)
MPS= Δ in Saving
Δ in Income
8. MPS + MPC always equals 1
9. All of these calculations give some insight in to how people will distribute
their money
B. Non-income determinants of Consumption and Saving (all possibilities)
1. Wealth (real assets)- Pushes consumption schedule up
2. Expectations of future income and prices- ex. Income ↑ consumption ↑
3. Real Interest Rates ↓ consumption ↑
4. Increasing Household Debt ↑ consumption ↑
However, abnormally high debt can push consumption down (due to
less borrowing.
5. Taxes ↑ C & S ↓
C. Movements along consumption and savings curves indicate changes in
Disposable IncomeD. Shifts in curves are a result of non-income
Determinants- Consumption and savings shifts are usually opposing
Macroeconomic Relationships
A. Interest Rate-Investment
1. Expected Rate of Return – r =
 Expected rate of return (r) – expected % of profit from an investment after all
costs have been accounted for. Investment $1,000 ; profit, $200, r= %20.
2. Real Interest Rate-True cost of borrowing
-if- r > i Invest
Profit maximizing point r = i
 Real Interest Rate-Financial cost of borrowing for the investment. Multiply the
Investment by the interest rate (i) . $1,000 X .05% (i) = $50. Thus:
IF= r > i then investment should be undertaken (actually, up to r=i)
3. Investment demand curve (fig. 9.5)
As interest rates rise, becoming more costly to borrow money in
relationship to the expected returns, investment declines. The
opposite is true for interest rates declining.
Lower i , higher quantity of Investment Demand
4. Shifts of Investment Demand Curve ( I = Investment )
a. Acquisition, Maintenance, operating costs ↑, I ↓
b. Business Taxes ↑, I ↓
c. Technological Change ↑, I ↑
d. Stock of capital goods ↑, I ↓
e. Expectations (prices, profits, expanding economy) ↑, I ↑
B. Instability of Investment ( fig.9.7)
1. Durability factor –Businesses can put off, or see great gain
2. Irregularity of Innovation- great upsurge in investment
3. Variability of Profits- Current profits tend to influence choices for
the future. More profits equal more funds for investment.
4. Variability of expectations- Can’t see the future-Mainly, these are
situations that affect profits but may be unforeseen (foreign
exchange rates, court decisions, governmental policies, trade
barrier changes)- All can influence investment negatively or