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How Does the Economy Works - Macroeconomics | SS 141, Study notes of Introduction to Macroeconomics

Material Type: Notes; Class: MACROECONOMICS; Subject: Social Sciences; University: Fashion Institute of Technology; Term: Unknown 1989;

Typology: Study notes

Pre 2010

Uploaded on 08/09/2009

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Pat Yanez, FIT
Basic
Basic
Macroeconomic
Macroeconomic
Relationships
Relationships
John Maynard Keynes
1883-1946
How does the economy works?
How does the economy works?
Chapter 9: Pages 152- 158
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Download How Does the Economy Works - Macroeconomics | SS 141 and more Study notes Introduction to Macroeconomics in PDF only on Docsity!

Click to edit Master title styleClick to edit Master title style Pat Yanez, FIT

Basic^ Basic

MacroeconomicMacroeconomicRelationshipsRelationships

John Maynard Keynes1883-

How does the economy works?^ How does the economy works?^ Chapter 9: Pages 152- 158

The Income-^ The Income Pat Yanez, FIT

-Consumption & IncomeConsumption & Income-

-Saving RelationshipsSaving Relationships

  • The consumption schedule- The savings schedule- Average and marginal Propensities- Nonincome determinants of consumption and saving- Terminology, shifts, and stability The Interest RateThe Interest Rate-

-Investment RelationshipInvestment Relationship

  • Expected rate of return (r)- The real interest rate (

i^ )

  • Investment demand curve- Shifts of the investment demand curve- Instability of investmentsThe Multiplier Effect The Multiplier Effect^ - Rationale- The multiplier and the marginal propensities- How large is the actual multiplier effect? Pat Yanez, FIT

Chapter 9 Outline^ Chapter 9 Outline

Income-^ Income Four Simplifications....^ Four Simplifications.... 1. A Closed Economy^ 1. A Closed Economy2. Ignore Government2. Ignore Government3. All Saving Is Personal3. All Saving Is Personal4. Net Income Abroad Is Zero4. Net Income Abroad Is Zero Pat Yanez, FIT

-Consumption & IncomeConsumption & Income-

-Saving RelationshipsSaving Relationships

Pat Yanez, FIT

Therefore, GDP =^ Therefore,

GDP = DI = C + S

DI = C + S

We^ call

this^ a^

“private

closed

economy”

Consumption = Pat Yanez, FIT

Disposable Income

Consumption =

Disposable Income -

- SavingSaving

C = DI + SC = DI + S

The “consumption schedule” shows therelationship between disposable incomeand saving.Households consume

mostmost

of their

Income-^ Income disposable income

-Consumption RelationshipConsumption Relationship

Pat Yanez, FIT

Saving = Pat Yanez, FIT

Disposable Income

Saving =

Disposable Income -

- ConsumptionConsumption

S = DI -S = DI

- CC

The “saving schedule” shows therelationship between disposable incomeand consumption.Households save only a small proportionof their income

Income-^ Income

-Saving RelationshipSaving Relationship

Pat Yanez, FIT

Pat Yanez, FIT

Income-^ Income

-Saving RelationshipSaving Relationship

Row# Pat Yanez, FIT [ 1 ]Level of Outputand Income( GDP = DI )

[ 2 ]^ [ 3 ]ConsumptionSaving (S)( C )[ 1 ] - [ 2 ] 1 $

Saving Schedule^40

o Saving

S GDP, DI Saving Schedule 390

Pat Yanez, FIT

Average Propensities

Pat Yanez, FIT

[ 1 ] Row Level of Output # and Income( GDP = DI )

[ 2 ]Consumption( C )

[ 3 ]Saving (S)[ 1 ] - [ 2 ]

[ 4 ]^ [ 5 ]AverageAveragePropensityPropensityto Consume,to Save,( APC )(APS)[ 2 ] / [ 1 ][ 3 ] / [ 1 ]

1.00^ 0.
0.99^ 0.

Pat Yanez, FIT

Marginal Propensities

Δ^ Consumption^ Δ^ Income MPC ==MPC The proportion of any change in income that is consumed Pat Yanez, FIT

is the

marginal propensity to consume (MPC):

Δ^ Saving Δ^ Income

The proportion of any change in income that is savedMPS ==MPS

is the

marginal propensity to save (MPS):

In summary: ConsumptionDisposable IncomeSavingDisposable IncomeChange in ConsumptionChange in Disposable IncomeChange in SavingChange in Disposable Income

APC =APC = APS =^ APS = MPC =^ MPC = MPS =MPS = Pat Yanez, FIT

Pat Yanez, FIT

Consumptiono^45 o^

Disposable Income o Saving

Disposable Income

Graphically Presented...^ Pat Yanez, FIT

Consumptiono^45 o^ oSaving

C Consumptionschedule^ S

Savingschedule

C S

Disposable IncomeDisposable Income

SAVING SAVING

DISSAVING DISSAVING

MPC = Slope of C^ MPS = Slope of S

Graphically Presented...^ Pat Yanez, FIT

AVERAGE PROPENSITY TO CONSUMEAVERAGE PROPENSITY TO CONSUME

.^ .^ .^ .^

U.S.CanadaBritain NetherlandsGermany

ItalyJapanFrance Pat Yanez, FIT

Consumptiono^45 o^ oSaving

C S

C S

Disposable IncomeDisposable Income

Shifts in C and S^ Pat Yanez, FIT

Consumptiono^45 o^ oSaving

C^ S

C S

Disposable IncomeDisposable Income

C

C

An^ Anincrease inincrease inconsumption...consumption...

Shifts in C and S^ Pat Yanez, FIT