BasicMacroRelationshipsTest.pdf - Basic Macroeconomic...

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Basic Macroeconomic Relationships Income-Consumption Relationship: -AE=C+I+G+X=GDP -How much do people spend? It depends on their income. The more they make, the more they spend. -Income (Y)= C+S--you either spend your money or you save it. -In this-our first example-we have no taxes-so Y=DI -If we plot a nation’s consumption levels--you would see that there is a positive correlation between income and consumption and that households spend (not save) the vast majority of their incomes but the proportions of C and S will vary with income--meaning at low levels of income--saving is very low, and even can be negative. -Consumption Schedule→ this hypothetical data can be plotted to show how much people are spending at each level of income -Saving Schedule→ it it the amount saved at different levels of income--just subtract C from DI. The break even point is where saving=0. -45° Line→ Breakeven line (Keynesian Cross) -The linear equation for setting the C function on a graph: C=a+bY -B=MPC, marginal propensity to consume -Consult graphs in the packet Average and Marginal Propensities to Consume and Save: -APC: the % of total income that is consumed -APS: the % of total income that is saved -Formulas: APC=C/Y, APS=S/Y -Marginal Propensity to Consume -MPC=the ratio of a change in consumption to a change in income ( 𝚫 C/ 𝚫 Y) -MPS=the ratio of a change in saving to change in income ( 𝚫 S/ 𝚫 Y) -The MPC is the numerical value of the slope of the C function -The MPS is the numerical value of the slope of the S function -Movement along C→ 𝚫 Y -The C function is the most is the stable component of GDP in a society--but it can move.
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  • Fall '10
  • Mrs.Lifson

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