Basic Macroeconomic Relationships
Chapter 13
Assumptions & Current Relevance:
Prices in modern eco = inflexible
Simplifications downward over short periods of time.
Keynes created aggregate How eco likely 2 adj 2 eco shocks over
expenditures model in Great shorter time periods.
Depression 2 explain why happened & Income Consumption &
how end.
Income Saving
Stuck –Price Model Income-Consumption (C)
Positive relationship: more cons earn
Underpinning aggregate expenditures
(after tax), more spend (but not
model reflect eco conditions in Great
necessarily all)
Depression.
Income-Savings (S)
Assume prices = fixed (price lvl cannot
Savings = not spending/part of
change).
disposable income not consumed.
Prices not declined sufficiently 2
Positive relationship: more cons earn,
boost spending & maintain output/
more income can save.
employment.
Yd = Disposable Income(DI)
Unplanned Inventory Adjs Key determinant of consumption.
Represents personal consumer income
Keynes thought unemployment of
after taxes (Yd = total income – taxes)
labour & capital caused by firms
reacting in predictable way 2
unplanned incr in inventory.
Households reduced spending –
inventory of unsold goods
Consumption Schedule
unexpectedly surged.
Amts households plan 2 spend on cons
Not slash prices & not sell fast enough
goods @ diff lvls of disposable income.
– reduce rate of production & some
Saving Schedule
close.
Amts plan 2 save (not spend on goods)
Production dec in response 2
@ diff lvls of disposable income.
unexpected inventory changes:
▪ Unexpectedly rising – cut back on
production (balance production w/
sales & prevent inventory from
exceeding capacity).
▪ Unexpectedly falling – increase
production 2 take adv of good
selling env.
, Marginal Propensity 2 Save (MPS)
Fraction of any change in disposable
income households save; equal 2
change in saving divided by change in
disposable income.
MPC + MPS = 1
▪ fraction of any income change not
consumed = saved.
MPC & MPS as slopes:
▪ MPC: numerical value of slope of
consumption schedule.
▪ MPS: numerical value of slope of
saving schedule.
45° line - line along which value
of GDP (measured horizontally) = equal
2 value of aggregate expenditures
(measured vertically).
Break-even income: lvl of disposable
income @ which households plan 2
consume all income & save none of it;
also, in income transfer programme,
level of earned income @ which
subsidy payments become zero.
Read explanation p 145
Marginal Propensity 2 Consume (MPC)
Fraction of any change in disposable
income spent on cons goods; equal 2
change in consumption divided by
change in disposable income.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller amywallace. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.70. You're not tied to anything after your purchase.
