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Basic Macro Relationships

Basic Macro Relationships. DI= Consumption + Savings . Factors that Determine C/S DI As DI declines---S declines 45 degree reference line C=DI Savings=amount by which actual C falls short of 45 degree line. o. 45. CONSUMPTION AND SAVING. SAVING. C. Consumption. Consumption

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Basic Macro Relationships

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  1. Basic Macro Relationships

  2. DI= Consumption + Savings • Factors that Determine C/S • DI • As DI declines---S declines • 45 degree reference line • C=DI • Savings=amount by which actual C falls short of 45 degree line

  3. o 45 CONSUMPTION AND SAVING SAVING C Consumption Consumption schedule C MPC = Slope of C MPC + MPS = 1 DISSAVING o Disposable Income MPS = Slope of S Saving schedule S Saving SAVING o S DISSAVING Disposable Income

  4. Non-Income Determinants of C & S • Wealth • Amount of all assets owned • Equity • Real assets vs. financial assets • Usually—if wealth increases • C moves up; S down

  5. Non-Income Determinants of C & S • Expectations • Expect recession---- • C decreases; S increases • Expect prices to rise tomorrow--- • C increases; S decreases

  6. Non-Income Determinants of C & S • Real interest rates • Adjusted for Inflation • idecreases then borrowing increases • iincreases then borrowing decreases • If you borrow more---Consume more—save less • At low interest rates—less incentive to save—Why?

  7. Non-Income Determinants of C & S • Household debt • As % of DI • Held constant when drawing C schedule • If consumers increase debt---increase C more at each level • BUT “No Free Lunch” • Short term- C increases • Long term- C decreases • Taxes • Shift both C and S

  8. o 45 TERMINOLOGY, SHIFTS, & STABILITY C1 C0 Increases in Consumption Means… Consumption o Disposable Income A Decrease In Saving S0 S1 Saving o Disposable Income

  9. o 45 TERMINOLOGY, SHIFTS, & STABILITY C0 C2 Decreases in Consumption Means… Consumption o Disposable Income S2 An Increase In Saving S0 Saving o Disposable Income

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