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Chapter 12
Keynesian Economics:
An Expanded View
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I. Understanding
aggregate demand (C + I + G + EN )
A. Consumption and Saving
1.
Average Propensity to Consume (APC) is consumption (C)
divided by income
(Y).
a. APC = C/Y
b. APC decreases as income increases as people can afford to
save.
2. Marginal
Propensity to Consume (MPC) is the change in
consumption divided by the
change in income.
a. MPC decreases as income increases.
b. This makes sense because when an average is falling, what is
happening on the
margin must be less.
1) Suppose your test average after one test is 90 and after
2 tests its 80.
2) Your second test had to be below 80 to pull the average
down. Test 2 was a 70
and (90 + 70) / 2 = 80.
3. Saving
(S) is income minus consumption. S = Y - C
4. Average
Propensity to Save (APS) is saving divided by income
a. APS
= S/Y
b. If APC drops as income increases, then APS increases as
income increases
because
APC + APS = 1
5. Marginal
Propensity to Save is change in saving divided by
change
in income.
a. MPS
increases as income increases because wealthy people can
afford to save a higher
percentage of income.
b.
This makes sense because when an average is rising, what is
happening on
the margin
must be higher.
Other factors affecting consumption and therefore saving include
wealth (savings), expectations about personal needs and future
economic activity, and concerns about consumer, business, and
government debt.
B. Investment is business spending on capital goods, inventory, and
research & development.
1. The level of investment is a function of expected profit, interest rates,
and the level of technology required to maintain a desired competitive
position.
2. Investment spending tends to be somewhat volatile.
C. Government Spending is assumed to be constant.
D. Net Exports, exports minus imports, are also assumed to be constant
for this simplified model.
Note: Points on a 45-degree line
equate values on the x and y axes
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