Eco 200 – Principles of

Macroeconomics

Chapter 10:Aggregate Expenditures

Consumption and Saving
 Yd = C+S
 S = Yd – C
 C = a + bYd
 a = intercept
 b = slope
(= C/Yd)
Saving and Dissaving
 C > Yd: S < 0
 C < Yd: S > 0
 C = Yd: S = 0
MPC and MPS
 MPC = marginal propensity to consume = additional
consumption resulting from an additional dollar of
disposable income
 MPC = C/Yd = slope of the consumption function
(b in the example above)
 MPS = marginal propensity to save = additional saving
resulting from an additional dollar of disposable
income = S/Yd
 MPC + MPS = 1
 C = a + bYd
 S=?

S = -a + (1-b) Yd
APC and APS
 Average propensity to consume (APC) =
C / Yd
 Average propensity to save (APS) = S
/ Yd
 APC + APS = 1
 When C > Yd, APC > 1, APS < 0
 C = Yd, APC=1, APS = 0
 C < Yd, APC < 1, APS > 0
Example: Consumption
function
Yd C S APC APS MPC MPS
0 40
100 120
200 200
300 280
400 360
500 440
Example: Consumption
function
Yd C S APC APS MPC MPS
0 40 -40
100 120 -20
200 200 0
300 280 20
400 360 40
500 440 60
Example: Consumption
function
Yd C S APC APS MPC MPS
0 40 -40 -
100 120 -20 1.20
200 200 0 1.00
300 280 20 0.93
400 360 40 0.90
500 440 60 0.88
Example: Consumption
function
Yd C S APC APS MPC MPS
0 40 -40 - -
100 120 -20 1.20 -0.20
200 200 0 1.00 0.00
300 280 20 0.93 0.07
400 360 40 0.90 0.10
500 440 60 0.88 0.12
Example: Consumption
function
Yd C S APC APS MPC MPS
0 40 -40 - - -
100 120 -20 1.20 -0.20 0.8
200 200 0 1.00 0.00 0.8
300 280 20 0.93 0.07 0.8
400 360 40 0.90 0.10 0.8
500 440 60 0.88 0.12 0.8
Example: Consumption
function
Yd C S APC APS MPC MPS
0 40 -40 - - - -
100 120 -20 1.20 -0.20 0.8 0.2
200 200 0 1.00 0.00 0.8 0.2
300 280 20 0.93 0.07 0.8 0.2
400 360 40 0.90 0.10 0.8 0.2
500 440 60 0.88 0.12 0.8 0.2
Determinants of consumption
 The consumption function (as a
function of real GDP) will shift due to
changes in:
 taxes and transfer payments
 wealth
 expectations
 demographics
Investment
 Investment is autonomous (it is
assumed that investment doesn’t
change when real GDP changes)
Determinants of investment
 Investment spending is affected by:
 the interest rate
 profit expectations
 technological change
 cost of capital goods
 capacity utilization
Volatility of investment
 Investment is the most volatile component of
aggregate expenditures as a result of:
 large fluctuations in interest rates
 sudden changes in expectations
 uneven rates of technological change
 changes in tax policy
 fluctuations in capacity utilization over the
business cycle
Government spending
 autonomous
Net Exports
 Exports – assumed to be autonomous
 Imports – increase with GDP
 X – declines as GDP rises
MPI
 Marginal propensity to import = change
in imports that result from a one-dollar
increase in income = imports / Y
Y Exports Imports X

0 20 0 20 MPI = ?
100 20 10 10

200 20 20 0

300 20 30 -10
Aggregate expenditures
 AE = C + I + G + X