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ECON CH. 8 Connect Notes

by: itswingo

ECON CH. 8 Connect Notes ECO2013


GPA 3.32

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About this Document

- Income Consumption - Disposable Income - Dissaving - Consumption Schedule - Saving Schedule - Etc. Etc.
Principles of Macroeconomics
Professor Sammie Young
Class Notes
fsw, floridasouthwestern, Econ, ecnomics, macroecon, Macroeconomics, Chapter8, connect, Homework, notes
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This 2 page Class Notes was uploaded by itswingo on Saturday October 15, 2016. The Class Notes belongs to ECO2013 at Florida SouthWestern State College taught by Professor Sammie Young in Fall 2016. Since its upload, it has received 2 views. For similar materials see Principles of Macroeconomics in Economics at Florida SouthWestern State College.


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Date Created: 10/15/16
Macroeconomics Module 8 Notes: Basic Macroeconomic Relationships  The Income ­Consumption and Income­Saving Relationships o Economists define personal saving as “not spending” or “that part of disposable (after­tax)  income not consumed o Saving (S) = Disposable Income (DI) – Consumption (C)  We only need to subtract consumption from disposable income to find the amount  saved at each disposable income.  Each point on the 45 line consumption equals DI o Consumption is directly (positively) related to disposable income o As disposable income increases, consumption and saving both increase.  A decrease in disposable income will cause a movement down along an economy’s  consumption schedule.  Consumption Schedule o Consumption Schedule (Consumption Function) reflects direct consumption­disposable  income relationship.  Shows the amounts households intend to consume at various possible levels of  aggregate income.  Saving Schedule o Saving Schedule (saving function) o Dissaving (consuming in excess of after­tax income) will occur at relatively low Dis o The break­even income is the income level at which households plan to consume their entire  incomes (C=DI)  Average and Marginal Propensities o Average Propensity to Consume (APC) = The fraction or percentage of total income  consumed o Average Propensity to Save (APS) =fraction of total income that is saved  APC = consumption / income  APS = saving / income o Marginal Propensity to Consume (MPC) = proportion or fraction of any change in income  consumed  Marginal = “extra” or “a change in”   MPC = change in consumption / change in income o Marginal Propensity to Save (MPS) = fraction of any change in income saved  MPS = change in saving / change in income o The sum of MPC and MPS for any change in disposable income bust always be 1 o Consuming or saving out of extra income is an either­or proposition  MPC + MPS = 1     Other Notes:  The most important determinant of consumption and saving is the level of income  Other things equal, a decrease in the real interest rate will move the economy downward along its  existing investment demand curve.  A decrease in the real interest rate will increase the amount of investment spending  The investment demand curve would shift right as a result of businesses becoming more optimistic  about future business conditions  Investment spending in the U.S tend to be unstable because profits are highly variable.  The size of the multiplier is equal to the reciprocal of the slope of the saving schedule. 2


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