Transcript Module Income and Expenditure

Module 16
Income and
Expenditure
Use a
Picture
of a
retiree
here
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The nature of the multiplier, which shows how
initial changes in spending lead to further
changes
• The meaning of the aggregate consumption
function, which shows how current disposable
income affects consumer spending
• How expected future income and aggregate
wealth affect consumer spending
• The determinants of investment spending
• Why investment spending is considered a
leading indicator of the future state of the
economy
The Multiplier: An Informal
Introduction
• Marginal Propensity to
Consume (MPC)
MPC = ∆ Consumer Spending
∆ Disposable Income
MPS =
• Marginal Propensity to
Save (MPS)
∆ Saving
∆ Disposable Income
MPC + MPS = 1
MPC = 1 - MPS
MPS = 1 - MPC
The Multiplier: An Informal
Introduction
• Autonomous Change in
Aggregate Spending (AAS)
• Multiplier
1
∆Y = _________
X ∆AAS
(1 - MPC)
Multiplier =
_____
∆Y = _________
1
∆AAS (1 - MPC)
Current Disposable Income and
Consumer Spending
•Relationship between Disposable Income and
Consumer Spending
•Consumption Function
•Autonomous Consumer Spending (A)
•Aggregate Consumption Function
• C = A + MPC X DI
Shifts of the Aggregate
Consumption Function
•Changes in Expected Future Disposable
Income
• Permanent Income Hypothesis
•Changes in Aggregate Wealth
• Life-cycle Hypothesis
Investment Spending
• Planned Investment
The Interest Rate and
Investment Spending
r
r’
I
A decrease
in the real
interest rate
will result in
more gross
private
investment
I’
eve
Expected Future Real GDP, Production
Capacity, and Investment Spending
r
I
An increase
in either
expected
future real
GDP or
production
capacity will
result in
more
investment at
the same
interest rate
I’