Building the Aggregate Expenditures Mode Aggregate spending= consumption and investment.

nt. GDP, National Income, personal income, and disposable income are all equal. The basic premise of the aggregate expenditures model is that the amount of goods and services produced and therefore the level of employment depend directly on the level of aggregate expenditures (total spending). When aggregate expenditures fall, total output and employment decrease; when expenditures rise, total output and employment aggregate increases. We assume that the economy has excess production capacity and unemployed labor (unless specified otherwise). Personal saving: not spending or part of disposable income not consumed. Saving(S) equals disposable income (DI) minus consumption (C). S= DI-C Since saving is the part of disposable income not consumed, DI is also the basic determinant of personal saving. C= DI Consumption Schedule: reflects the direct consumption-disposable income relationship, and it is consistent with many household budget studies. Households tend to spend a large proportion of a small disposable income than a large disposable income. Saving Schedule: S= DI-C The Break-even income is when consumption and disposable income are equal. Average propensity to consume(APC): the fraction, or percentage, of total income that is consumed. APC= Consumption/Income Average propensity to save: APS= Saving/Income. Marginal propensity to consume(MPC) is the proportion/fraction of any change in income consumed. MPC= Change in consumption/change in income Marginal propensity to save (MPS) is the ratio of a change in saving to the change in income that brought it about. MPS= Change in saving/Change in income. The sum of the MPC and the MPS for any change in disposable income must always be 1 MPC+MPS=1 The MPC is the numerical value of the slope of the consumption schedule, and the MPS is the numerical value of the slope of the saving schedule. The MPC is the slope (C/DI) of the consumption schedule, and the MPS is the slope (S/DI) of the saving schedule. The amount of disposable income is the basic determinant of the amounts households will consume and save. However, certain determinants other than income might cause households to consume more or less at each possible level of the income and thereby change the locations

of the consumption and saving schedules. These other determinants are wealth, expectations, indebtedness, and taxation. Other things equal, the greater the wealth households have accumulated, the larger is their collective consumption at any level of current income. wealth- real assets (house, automobiles, television sets, and other durables) and financial assets (cash, savings accounts, stocks, bonds, insurance policies, pensions) that households own. Wealth effect shifts the saving schedule downward and shifts the consumption schedule upward. Household expectations about future prices and income may affect current spending and saving. High expectations of higher prices could cause higher spending, and expectations over lower prices would result in less consumption. Taxation: paid partly at the expense of consumption and partly at the expense of saving. An increase in taxes shift consumption and saving schedules downward. A tax reduction would shift both of them upward. Household debt: When drawing a particular consumption schedule, we hold household debt as a percentage of DI. However, when consumer groups increase household debt, it causes an increase in current consumption, shifting the curve upward, and it shifts downward when household debt gets unnaturally high and consumption decreases to pay off loans. Terminoogy: the movement from one point to another on a consumption schedule. A change in the amount consumed, caused by a change in DI (or GDP). Stability can be caused because consumption-saving decisions are strongly influenced by longterm considerations such as saving for emergencies or saving for retirement. Both consumption spending and saving rise when disposable income increases, both fall when disposable income decreases. The average propensity to consume (APC) is the fraction of any specified level of disposable income that is spent on consumer goods, the average propensity to save (APS) is the fraction of any specified level of disposable income that is saved. The APC falls and the APS rises as disposable income increases. The marginal propensity to consume (MPC) is the fraction of a change in disposable income that is consumed, it is the slope of the consumption schedule. The marginal propensity to save (MPS) is the fraction of a change in disposable income that is saved; it is the slope of the saving schedule. Changes in consumer wealth, consumer expectations, household debts, and taxes can shift the consumption and saving schedules.