# Chapter 8 macro.docx

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19 Mar 2012
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Chapter 8 macro
8.1
- personal saving is the proportion of disposable income that is not utilized
- saving is calculated through this formula S = disposable income consumption
- a direct relationship exists with disposable income and consumption where the more DI there is the
more consumption that takes place
- the 45 degree line is a reference line where each point on the line is where consumption equals
disposable income
- the distance between the degree line and the horizontal line measures consumption or disposable
income
- saving is the amount of money where the actual consumption in any year falls under the 45 degree line
- there is a negative relationship between savings and disposable income
The consumption schedule
The consumption schedule/function portrays the amounts of income households are spending
at different amounts of usable income which demonstrates the direct relationship between the
two
The saving schedule
Is a schedule that shows how much households save of their disposable income at different
levels of disposable income
The Saving curve shows that a small proportion of income is saved at a low DI and that a higher
proportion of income is saved at higher income
Disaving (at low DIS) Is where the consumption curve is above the 45 degree line or where the
savings curve penetrates the horizontal axis
The break even income is where consumers spend all of their disposable income and save none
of it
At all levels of higher income a larger proportion of their disposable income is saved, this is the
vertical distance between the 45 degree line and the consumption line under it
APC and APS
The proportion of total income that is used is the average propensity to consume/APC, the
proportion of total income that is saved is the average propensity to save
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APC=Consumption/income
APS = saving/income
Because disposable income is composed of both of these, if we add them together we will get
the original income
MPC and MPS
The percentage of change in income consumed is the marginal propensity to consume.
The proportion of change in income saved is the marginal propensity to save
MPC = change in con/change in income, MPS = change in saving/change in income
The total of MPC and MPS for any change in disposable income must be equal to 1
MPC and MPS as slopes
The MPC is the slope of the consumption schedule and the MPS is the slope of the saving
schedule
Non-income determinants o consumption and saving
Amount of disposable income is the main factor that decides the amount households are going
to consume and save, however wealth, borrowing, expectations and real interest rates that
determine the saving and consumption that will partake in
Wealth
A household’s wealth is the amount of their total assets minus their obligations and accumulate
wealth by saving a portion of their current income. The purpose of saving money is to increase
the household’s consumption possibilities
When households experience a phenomenon that increases their income, the will consume
more and reduce their savings which is known as the wealth effect which is a downward shift of
the saving schedule and an upward shift of the consumption schedule
Borrowing
When people borrow they will be able to consume more than their original disposable income
allows which shifts the consumption curve upward, however this leads to long run lower
consumption possibilities as they will have to repay their obligation
The reverse wealth effect occurs when there is an unexpected change in wealth due to a shock
in the asset’s value
Expectations
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The household’s expectations about prices in the future and income will influence current
spending and saving
Real interest rates
When interest rates that have been adjusted for inflation decrease, households will borrow
more and consume more as they will be able to make those small timely payments and reduces
the likeliness to save and increases consumption slightly
More on consumption and saving schedules
Switch to real GDp
When creating macroeconomic models, economists change their focus from the relationship
between disposable income and disposable and savings to consumption and saving and real
GDp
Changes along schedules
Moving along the consumption curve is due to changes in disposable income, however if the
whole curve shifts upwards or downwards this is due to changes in any of the four
aforementioned factors
Schedule shifts
Changes in the four factors will shift the consumption schedule and the saving schedule in
opposite directions
Borrowing is considered negative saving as it is not their money and money has to be paid back
to the creditors
Taxation
Changes in tax cause a direct relationship between saving and consumption
Stability
The consumption and saving schedules are stable unless altered by major tax increases or
decreases, this stability is due to consumption being influenced by future expectations , stability
can also occur because changes in the non income determinant commonly work in opposite
directions and will cancel each other out
8.2
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