economics

McConnell
Brue
Flynn

Chapter 30
Basic Macroeconomic Relationships

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 Chapter Contents
The Income-Consumption and Income-Saving Relationships
Nonincome Determinants of Consumption and Saving
The Interest-Rate–Investment Relationship
Shifts of the Investment Demand Curve
The Multiplier Effect

30-2
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 Income, Consumption, and Saving
Consumption and saving:
• Primarily determined by DI
• Direct relationship
Consumption schedule: Planned household spending (in
our model).
Saving schedule:
• DI minus C.
LO30.1 • Dissaving can occur. 30-3

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 The COVID-19 Pandemic
Between 2019 and 2020, consumption fell despite an
increase in disposable income.
• COVID-19 stimulus payments increased disposable
income.
• People saved rather than spent much of that.
Inverse relationship lasted only one year.
Things went back to normal between 2020 and 2021.
LO30.1 30-4

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 Consumption and Disposable Income, 2002–2021

30-5
LO30.1
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 Consumption and Saving Schedules (in Billions) and
Propensities to Consume and Save
(4) (5) (6) (7)
Average Average Marginal Marginal
(1) Propensity to Propensity to Propensity to Propensity to
Level of Output (2) (3) Consume Save Consume Save
and Income Consumption Saving (S), (APC), (APS), (MPC), (MPS),
GDP = DI (C) (1) − (2) (2)/(1) (3)/(1) Δ(2)/Δ(1)* (3)/(1) *
(1) $370 $375 $− 5 1.01 −.01 .75 .25
(2) 390 390 0 1.00 .00 .75 .25
(3) 410 405 5 .99 .01 .75 .25
(4) 430 420 10 .98 .02 .75 .25
(5) 450 435 15 .97 .03 .75 .25
(6) 470 450 20 .96 .04 .75 .25
(7) 490 465 25 .95 .05 .75 .25
(8) 510 480 30 .94 .06 .75 .25
(9) 530 495 35 .93 .07 .75 .25
(10) 550 510 40 .93 .07

*The Greek letter Δ, delta, means “the change in.”

LO30.1 30-6

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 Consumption and Saving Schedules

LO30.1 30-7

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 Average Propensities
Average propensity to consume (APC): Fraction of
total income consumed.
Average propensity to save (APS): Fraction of total
income saved.

consumption saving
APC = income APS = income

APC + APS = 1
LO30.1 30-8

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 Global Perspective 30.1
AVERAGE PROPENSITIES TO CONSUME, SELECTED NATIONS, 2020

LO30.1 30-9

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 Marginal Propensities
Marginal propensity to consume (MPC): Proportion
of a change in income consumed.
Marginal propensity to save (MPS): Proportion of a
change in income saved.

change in consumption change in saving

MPC = MPS =
change in income change in income

MPC + MPS = 1
LO30.1 30-10

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 The Marginal Propensity to Consume and the Marginal
Propensity to Save

MPC =
15 = .75 MPS = 5 = .25
20 20 S
Consumption

C ($15)
S ($5)

Saving
DI ($20) DI ($20)

0
Disposable income
0
Disposable income
LO30.1 30-11

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 Nonincome Determinants
Amount of disposable income is the main
determinant.
Other determinants:
• Wealth
• Borrowing
• Expectations

LO30.2
• Real interest rates 30-12

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 Other Important Considerations
Switching to real GDP
Changes along schedules
Simultaneous shifts
Taxation
Stability
Paradox of Thrift
LO30.2 30-13

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 Shifts of Consumption and Saving Schedules
C1
C0
S2
C2
(billions of dollars)

(billions of dollars)
Consumption

S0

Saving
+ S1

b 0
–
a

45°

0
Real GDP (billions of dollars) Real GDP (billions of dollars)
(a) (b)
Consumption schedule Saving schedule

LO30.2 30-14

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 Interest-Rate–Investment Relationship
Expected rate of return
The real interest rate
Investment demand curve

LO30.3 30-15

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 Investment Demand Curve
Real Interest Cumulative Amount of 16
Rate (i) and Investment Having this
Expected Rate Rate of Return or Higher, 14
of Return (r) Billions per Year

and real interest rate, i (percents)

Investment
16% $ 0

Expected rate of return, r

12
demand
14 5 10
curve

12 10
8
10 15
6
8 20
6 25 4

4 30 2
2 35 ID
0 40 0 5 10 15 20 25 30 35 40
Investment (billions of dollars)
LO30.3 30-16

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 Shifts of the Investment Demand Curve
Acquisition, maintenance, and operating costs
Business taxes
Technological change
Stock of capital goods on hand
Planned inventory changes
Expectations
LO30.4 30-17

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 Shifts of the Investment Demand Curve
Increase

Expected rate of return, r, and

real interest rate, i (percents)
in investment
demand

Decrease in
investment
demand
ID2 ID0 ID1

0
Investment (billions of dollars)

LO30.4 30-18

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 Instability of Investment
Variability of expectations
Durability
Irregularity of innovation
Variability of profits

LO30.4 30-19

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 The Multiplier Effect
A change in spending changes real GDP more than the
initial change in spending.
The multiplier determines how much larger that
change will be.
change in real GDP
Multiplier =
initial change in spending

Change in GDP = multiplier × initial change in spending

LO30.5 30-20

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 The Multiplier Process (MPC = 0.75)

LO30.5 30-21

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 Multiplier and Marginal Propensities
Multiplier and MPC directly related: Large MPC results
in larger increases in spending.
Multiplier and MPS inversely related: Large MPS
results in smaller increases in spending.

1 1
Multiplier = Multiplier =
1 − MPC MPS

LO30.5 30-22

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 The MPC and the Multiplier

LO30.5 30-23

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 How Large Is the Actual Multiplier?
Actual multiplier is lower than the model assumes.
Consumers buy imported products.
Households pay income taxes.
Inflation.
Multiplier may be 0.

LO30.5 30-24

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 Last Word: Toppling Dominoes
Humorous example of the multiplier.
One person in town decides not to buy a product.
Creates a ripple effect of people not spending,
following the first decision.
Ultimately, the entire town experiences an economic
downturn.

30-25

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