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) • Marginal Propensity to Save (MPS) MPC = MPS = ∆ Consumer Spending ∆ Disposable Income ∆ Saving ∆ Disposable Income MPC + MPS = 1 MPC = 1 - MPS MPS = 1 - MPC

The Multiplier: An Informal Introduction • Autonomous Change in Aggregate Spending (AAS) • Multiplier ∆Y = _________ (1 - MPC) X ∆AAS Multiplier = ∆Y ∆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 A decrease in the real interest rate will result in more gross private investment r r’ I I’

eve Expected Future Real GDP, Production Capacity, and Investment Spending An increase in either expected future real GDP or production capacity will result in more investment at the same interest rate r I I’