ch23 - Chapter 23 Expenditure Multipliers Expenditure Plans...

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Unformatted text preview: Chapter 23 Expenditure Multipliers Expenditure Plans and GDP Several factors influence consumption expenditure and saving. The most direct influence is disposable income , which is real GDP or aggregate income minus net taxes (taxes minus transfer payments). Planned consumption expenditure plus planned saving equals disposable income. The greater the disposable income, the greater is consumption expenditure and the greater is saving. The relationship between consumption expenditure and disposable income, other things remaining the same, is called the consumption function . The relationship between saving and disposable income, other things remaining the same, is called the saving function . The extent to which a change in disposable income changes consumption expenditure depends on the marginal propensity to consume. The marginal propensity to consume ( MPC ) is the fraction of a change in disposable income that is consumed. The marginal propensity to consume is calculated as the change in consumption expenditure C , divided by the change in disposable income, YD . That is: MPC = C YD The extent to which a change in disposable income changes saving depends on the marginal propensity to save. The marginal propensity to save ( MPS ) is the fraction of a change in disposable income that is saved. The marginal propensity to save is calculated as the change in saving S , divided by the change in disposable income, YD . That is: MPS = S YD The marginal propensity to consume plus the marginal propensity to save sum to 1. You can see this from the following: C + S = YD C + S = YD ( C YD ) + ( S YD ) = ( YD YD ) MPC + MPS = 1 The figure below shows the MPC as the slope of the consumption function. MPC is $150 billion $200 billion = 0.75 The figure below shows the MPS as the slope of the saving function. MPS is $50 billion $200 billion = 0.25. The relationship between imports and real GDP is determined by the marginal propensity to import. The marginal propensity to import is the fraction of an increase in real GDP that is spent on imports. It is calculated as the change in imports divided by the change in real GDP that brought it about, other things remaining the same. Equilibrium Expenditure at a Fixed Price Level Aggregate planned expenditure equals planned consumption expenditure plus planned investment plus planned government expenditures plus planned exports minus planned imports. The table sets out an aggregate expenditure schedule, together with the components of aggregate planned expenditure....
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This note was uploaded on 06/30/2009 for the course ECON 1020 taught by Professor Parkin during the Spring '09 term at UWO.

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ch23 - Chapter 23 Expenditure Multipliers Expenditure Plans...

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