This document presents slides on macroeconomic concepts related to consumption, saving, investment, and equilibrium GDP in a closed economy. It introduces key terms like the consumption schedule, saving schedule, average and marginal propensities to consume, investment demand curve, and equilibrium GDP. The slides define these concepts, show them graphically, and discuss how shifts can occur. It also covers non-income determinants of consumption and saving, shifts in investment demand, the instability of investment, and how equilibrium GDP is achieved through the equality of planned savings and investment.
1. 9 - 1
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Building the
Aggregate Expenditures
Model
9C H A P T E R
2. 9 - 2
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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PRIVATE CLOSED ECONOMY
Simplifications...
• A Closed Economy
• Defer Government & Taxes
• Defer Exports and Imports
• All Saving Is Personal
• Net Income Abroad Is Zero
•Aggregate Spending =
Consumption and Investment
3. 9 - 3
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Saving (S) = Disposable Income (DI) -
Consumption (C)
Households consume most of
their disposable income
Consumption & saving are
directly related to income
Consumption Schedule
Saving Schedule
Breakeven Income
CONSUMPTION AND SAVING
4. 9 - 4
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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ConsumptionSaving
o
o
45
o
C
S
Consumption
schedule
Saving
schedule
C
S
Disposable Income
Disposable Income
SAVING
SAVING
DISSAVING
DISSAVING
MPC = Slope of C
MPS = Slope of S
MPC + MPS = 1
CONSUMPTION AND SAVING
5. 9 - 5
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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CONSUMPTION AND SAVING
APC
Consumption / Disposable Income
APS
Saving / Disposable Income
MPS
Change in Saving
Change in Disposable Income
MPC
Change in Consumption
Change in Disposable Income
6. 9 - 6
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
Previous
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Next
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End
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.80 .85 .90 .95 1.0
.986
.976
.972
.940
.907
.873
.869
.842
Canada
United States
Netherlands
United Kingdom
Germany
Italy
Japan
France
GLOBAL PERSPECTIVE
Average Propensities to Consume,
Selected Nations, 1999
Statistical Abstract of the United States, 2000
7. 9 - 7
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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NONINCOME DETERMINANTS
OF CONSUMPTION AND SAVING
• Wealth
• Wealth Effects
• Expectations
• Taxation
• Household Debt
8. 9 - 8
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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• Terminology
• Schedule Shifts
• Stability
Graphically…
TERMINOLOGY, SHIFTS, & STABILITY
9. 9 - 9
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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End
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ConsumptionSaving
o
o
45
o
C0
S0
Disposable Income
Disposable Income
C1
S1
TERMINOLOGY, SHIFTS, & STABILITY
Increases in
Consumption
Means…
A Decrease
In Saving
10. 9 - 10
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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ConsumptionSaving
o
o
45
o
C0
S0
Disposable Income
Disposable Income
C2
S2
TERMINOLOGY, SHIFTS, & STABILITY
Decreases in
Consumption
Means…
An Increase
In Saving
11. 9 - 11
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Expected Rate of Return, r
Real Interest Rate, i
Inverse relationship between
Investment demand and the
expected rate of return
INVESTMENT
Graphically presented...
12. 9 - 12
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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Show Investment (billions of dollars)
Expectedrateofreturn,r,
andinterestrate,i(percents)
16
14
12
10
8
6
4
2
0
INVESTMENT
DEMAND
CURVE
5 10 15 20 25 30 35 40
INVESTMENT
I D
13. 9 - 13
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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•Acquisition, Maintenance,
and Operating Costs
•Business Taxes
•Technological Change
•Stock of Capital Goods on
Hand
•Expectations
SHIFTS IN INVESTMENT DEMAND
14. 9 - 14
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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GLOBAL PERSPECTIVE
Gross Investment Expenditures as a
Percentage of GDP, Selected Nations
40%
30%
20%
10%
0%
Germany FranceUnited
States
CanadaMexico United
Kingdom
SwedenJapan South
Korea
Source: World Bank
15. 9 - 15
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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End
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INVESTMENT DEMAND & SCHEDULE
Expectedrateofreturn,r,and
realinterestrate,i(percents)
Investment
(billionsofdollars)Investment
(billions of dollars)
20
8
20
Real Domestic Product, GDP
(billions of dollars)
I D
Ig
Investment
Demand
Curve
Investment
Schedule
20
20
16. 9 - 16
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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•Durability of Capital and
Variability of Expectations
•Irregularity of Innovation
•Volatility of Investment
INSTABILITY OF INVESTMENT
17. 9 - 17
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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EQUILIBRIUM GDP
GDP = C + Ig
Real Domestic Output
Aggregate Expenditures Schedule
Equilibrium GDP
Saving and Planned Investment are
Equal
•Leakage
•Injection
No Unplanned Changes in
Inventories
Actual Investment
18. 9 - 18
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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Privatespending,C+Ig(billionsofdollars)
o
45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
19. 9 - 19
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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Privatespending,C+Ig(billionsofdollars)
o
45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
Say’s Law
20. 9 - 20
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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End
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Privatespending,C+Ig(billionsofdollars)
o
45
o
C
C + Ig
Ig = $20 Billion
Equilibrium
Real domestic product, GDP (billions of dollars)
370 390 410 430 450 470 490 510 530 550
(C + I g = GDP)
EQUILIBRIUM GDP
C =$450 Billion
$530
510
490
470
450
430
410
390
370
Chapter
Conclusions
21. • consumption schedule
• saving schedule
• break-even income
• average propensity to consume (APC)
• average propensity to save (APS)
• marginal propensity to consume (MPC)
• marginal propensity to save (MPS)
• wealth effect
• expected rate of return
• real interest rate
• investment demand curve
• planned investment
• investment schedule
• aggregate expenditures
schedule
• equilibrium GDP
• 45 degree line
• leakage
• injection
• unplanned changes in
inventories
• actual investment
Copyright McGraw-Hill/Irwin, 2002
ENDBACK
22. 9 - 22
Copyright McGraw-Hill/Irwin, 2002
Private Closed Economy
Consumption and Saving
Nonincome Determinants of Consumption and Saving
Terminology, Shifts, and Stability
Investment
Shifts in Investment Demand
Investment Demand and Schedule
Instability of Investment
Equilibrium GDP
Key Terms
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Next
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Next...
Aggregate Expenditures
The Multiplier, Net Exports,
and Government
Chapter 10