AP MACRO
Chapter 9
Basic Macro Relationships
Personal Savings=DIConsumption

Factors that Determine Savings
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
PROPENSITIES

APC + APS=1
Consumption/DI
 Savings/DI


MPC + MPS=1
Change in C/Change in DI
 Change in S/change in DI

Non-Income Determinants of
C&S

1-wealth
 Real assets vs. financial assets
 Usually—if wealth increases-----C moves up; S down

2-expectations
 Expect recession--- Expect prices to rise tomorrow---

3-real interest rates
 If you borrow more---Consume more—save less
 At low interest rates—less incentive

4-household debt
 As % of DI
 Held constant when drawing C schedule
 If consumers increase debt---increase C more at each level

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
Terminology

Change in amount consumed---move
pt. to pt


Caused by a change in GDP or
income
Change in determinant

Redraw the entire graph
Interest rate investment
relationship
Business—plants/inventory
 MC=interest rate paid for borrowing
 Vs.
 MB=expected rate of return on
investment

1st key determinant of
Investment Spending
1-expected rate of return=profit
 Profit/cost
 Example:

Spend $10,000
 Make $12,000 net revenue

• Profit=2,000
• 2,000/10,000=20% rate of return
• Rate of return=r
2nd determinant
Real rate of interest (i)
 Financial cost of borrowing
 Example:


If interest rate is 7% on $10,000
•
•
•
•
$700 interest cost
Compare to expected rate of return
$2,000-700=$1300 profit
r>i up to the point that r=i
Key concerns

What if the company is NOT
borrowing?


Opportunity cost
Real interest rate not nominal
Interest Rate – Investment
Relationship
and interest rate, i (percents)
Expected rate of return,
r,
16
14
INVESTMENT
DEMAND
CURVE
12
10
8
6
4
2
ID
0
5
10
15
20
25
30
35
40
Investment (billions of dollars)
What makes Investment
Demand Shift?
1-acquisition, maintenance &
operating costs
 2-business taxes
 3-technological change
 4-stock of capital goods in hand
 5-expectations

Investment-most volatile part
of GDP
1-durability
 2-irregularity of innovation
 3-variability of profits
 4-variability of expectations
