Chapter 30 _ Basic Macroeconomic Relationships _ ECON 2020.pdf - \u201cThis chapter begins that process by examining the basic relationships that exist

Chapter 30 _ Basic Macroeconomic Relationships _ ECON 2020.pdf

This preview shows page 1 - 4 out of 17 pages.

“This chapter begins that process by examining the basic relationships that exist between three different pairs of economic aggregates (aggregates means total or combined). Specifically, this chapter looks at the relationships between: Income and consumption (and income and saving). The interest rate and investment. Changes in spending and changes in output”. “What explains the trends in consumption (consumer spending) and saving reported in the news? How do changes in interest rates affect investment? How can initial changes in spending ultimately produce multiplied changes in GDP? The basic macroeconomic relationships discussed in this chapter answer these questions.” 30.1 [The Income-Consumption and Income-Saving Relationships]: Describe how changes in income affect consumption (and saving). The relationship shown on the graph above is one of the best established relationships in macroeconomics, exploring the relationship between income and saving. The line C is loosely fitted in between the points, showing that the line is closely related to the disposable income line. The red line, or the 45 degree reference line, shows that whenever a point (specific year) lands on it, consumption equals disposable income therefore there is no saving. Anything in between the red and blue lines means that there was at least some amount of saving. The dots in Figure 30.1 represent historical data—the actual amounts of DI, C, and S in the United States over a period of years. But because we want to understand how the economy would behave under different possible scenarios, we need a schedule showing the various amounts that households would plan to consume at each of the various levels of disposable income that might prevail at some specific time. Columns 1 and 2 of Table 30.1, represented in Figure 30.2a (Key Graph), show the hypothetical consumption schedule that we require. This consumption schedule (or “consumption function”) reflects the direct consumption–disposable income relationship suggested by the data in Figure 30.1, and it is consistent with many household budget studies. In the aggregate, households increase their spending as their disposable income rises and spend a larger proportion of a small disposable income than of a large disposable income.
Image of page 1
(1) Level of Output and Income (GDP = DI) (2) Consumption (C) (3) Savin g (S), (1) − (2) (4) Average Propensity to Consume (APC), (2)/(1) (5) Average Propensity to Save (APS), (3)/(1) (6) Marginal Propensity to Consume (MPC), Δ(2)/Δ(1)* (7) Marginal Propensity to Save (MPS), Δ(3)/Δ(1)* (1) $370 $375 $−5 1.01 −.01 .75 .25 (2) 390 390 0 1.00 .00 .75 .25 (3) 410 405 5 .99 .01 .75 .25 (4) 430 420 10 .98 .02 .75 .25 (5) 450 435 15 .97 .03 .75 .25 (6) 470 450 20 .96 .04 .75 .25 (7) 490 465 25 .95 .05 .75 .25 (8) 510 480 30 .94 .06 .75 .25 (9) 530 495 35 .93 .07 .75 .25 (10) 550 510 40 .93 .07
Image of page 2
It is relatively easy to derive a saving schedule (or “saving function”). Because saving equals disposable income less consumption (S = DI − C), we need only subtract consumption (Table 30.1,
Image of page 3
Image of page 4

You've reached the end of your free preview.

Want to read all 17 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors