ECO 2013 (McConnell v21) - Ch10 with graphic.ppt - ECO 2013 Chapter 10 Basic Macroeconomic relationships ECO 2013 – Chapter 10 I INCOME AND

# ECO 2013 (McConnell v21) - Ch10 with graphic.ppt - ECO 2013...

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ECO 2013 - Chapter 10 Basic Macroeconomic relationships

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FSW ECO-2013 McConnell V21 nikishin 2 ECO 2013 – Chapter 10 I. INCOME AND CONSUMPTION (INCOME AND SAVING) Remember "personal saving" (S) is that part of disposable income (DI) that is not consumed (C). S equals DI minus C Relationship between DI and C. Vertical difference between the two lines represents savings. There is direct relationship between S and DI "CONSUMPTION SCHEDULE" OR "CONSUMPTION FUNCTION" reflects the assumed direct relationship between DI and C.
FSW ECO-2013 McConnell V21 nikishin 3 ECO 2013 – Chapter 10 Table 10.1

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FSW ECO-2013 McConnell V21 nikishin 4 ECO 2013 – Chapter 10 In general households increase their spending as their income rises The higher the DI the largest of it is spent The lower the DI the smaller part of it is spent. "SAVING SCHEDULE" OR "SAVING FUNCTION" is obtained by subtracting consumption from DI There is a direct relationship between saving and DI: high DI – high savings; low DI – low saving Saving stops at relatively lower DI
FSW ECO-2013 McConnell V21 nikishin 5 ECO 2013 – Chapter 10 [However this relationship is invalid when C>DI. In that case we observe a "dissaving". Consumers then must use other source of money than their income, such as selling wedding rings or stocks or taking a loan, to pay for the consumption. In such a case the rate of S (savings) is negative] Fig. 10.2 (next page) BREAK-EVEN INCOME is the income level at which households plan to consume their entire income: C=DI [Remember DI is income after taxes] EFFECT OF DEBT When debt increases consumption is increased. Reverse is also true

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FSW ECO-2013 McConnell V21 nikishin 6 ECO 2013 – Chapter 10 Fig. 10.2
FSW ECO-2013 McConnell V21 nikishin 7 ECO 2013 – Chapter 10 II. AVERAGE AND MARGINAL PROPENSITIES Definitions in your book: AVERAGE PROPENSITY TO CONSUME (APC) is the average tendency to consume a certain part (percentage) of the total income AVERAGE PROPENSITY TO SAVE (APS) is the average tendency to save a certain part (percentage) of the total income Remember the Disposable income (DI) is the Total income minus taxes (because taxes are not under control of the consumer)

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FSW ECO-2013 McConnell V21 nikishin 8 ECO 2013 – Chapter 10 Therefore The CORRECT DEFINITIONS are: APC IS THE AVERAGE TENDENCY TO CONSUME A CERTAIN PART (PERCENTAGE) OF THE DISPOSABLE INCOME (DI) APS IS THE AVERAGE TENDENCY TO SAVA A CERTAIN PART (PERCENTAGE) OF THE DISPOSABLE INCOME (DI) This is what the book uses in its examples and its graphs on pp 210.
• Fall '16
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