1) Income & Consumption (I & S)

2) Interest Rate & Investment

3) Changes Spending (D) & Changes Output (Production)

Spending

One of two things that can be done with Income

Not spending ($ remaining after consumption);

Part of Disposable Income (DI) not spent.

$ not spent for a specifc period from a specific amount of Income.

One of only two things that can be done w/ Income.

Inevitable Payments i.e. Wages/Salary, Rents or Interest rcv'd., 

Flow of $ (purchasing power) per unit of time

derived from use of human or property resources.

line on a graph that bisects the 90 degree right angle

each point on the line represents

Consumption (C) & Disposable Income (DI)

in a direct (positive) relationship

Describe the Vertical Distance between 45 degree line & the Consumption (C) line

-  and  -

What is represented when move rightward on the horizontal line

and

what is represented when move leftward?

Vertical distance Increases as move rightward along the horizontal line;

-  and  -

Vertical distance Decreases as move leftward along the horizontal line.

Other-things-equal: Ceteris paribus 

an economic assumption.

Relationship between

Income (I) and Savings (S)

Decreases in spending

either by Consumers, Consumption spending (C)

-- or  --

by gov't buying producing (I_g)

Saving (S) =

Disposable Income (DI)   Minus   Consumption (C)

Disposable Income (DI) is the most significant factor

determining a nation's levels of Consumption & Saving.

Discuss the consumption schedule?

Its function?

What it captures? 

How it works?

Why it is important to economists?

Consumption schedule is a graph

shows direct relationship between (C) & (DI)

(C) = Consumption;  (DI) = Disposable Income

Will capture aggregate Household behavior i.e.

Increase Spending as DI income increases

-- and --

Spend a larger portion of a small disposable income

than of a large disposable income

Important: #s be illustrated/brought to life

Used as an instrument to derive a final value

with use of other curves (like Consumption curve)

Discuss the slope of the 45 degree line in a 

Consumption Curve (Fig. 27.1)

Slope is always positive --

Less than 1.

Slope is = to "marginal propensity to consume"

which is how much a specific level of income will make you / or allow you to consume/spend

45 degree line: What is it used for/its purpose?

Pg 548 19e Fig 27.1

Used only to illustrate a relationship or for theoretical purposes.

It never shows an actual relationship between 2 factors.

In the case of Consumption: Line is used only to show where Consumption = Income -- given a derived consumption curve

People stop Spending.

This sets off other behavior:

Spending stops --> Businesses stop Producing --> (Profits drop) --> Bizs begin layoffs of Labor --> Fewer workers --> Lower output --> GDP trends down --> Unemployment rises

How does macroeconomics explain the Recession in the Business cycle?  

What suggestions does it make to fix this problem?

1 of 2

Macroeconomics offers several approaches.

1) Classical Approach - based on theories, ideas etc. from 1700's / before Industrial Revolution began. Economy will fix itself / move forward / trend to growth; no interference / no gov't intervention is needed.

Classicists dispute the existence of recession -- Proof: Say's Law ( if everything produced in economy is sold, there is enough $ in the economy via products' income or Profits to buy all that is produced ).

How does macroeconomics explain the Recession in the Business cycle?  

What suggestions does it make to fix this problem?

If it appears that a Recession occurs in the economy, the economic circumstances that look like recession won't last;

"Demand always chases Supply."

Economic issues always fix themselves shortly/soon, so don't touch anything / could cause problem if do.

"Supply creates its own Demand."

Why is the Supply (S) line on a S-D (Demand) curve a vertical line?  p 548, Fig. 27-1 "Consumption in '98"?

What causes this phenomena?

NOTE:  Fix this -- find correct language for Term card

Discuss Say's law

Who  -- What  -- When  -- Where  -- How

Say = Fra. economist -- 1700's - dev. theo. around time of Indust. Revo. -- sugg. gov't intervention in business causes problems tha AOwise would not occur

to Say, a classical economist, there is no such thing as recession  -- 

• expression of laissez-faire economics

if there is economic activity that looks like recession, economy will simply act to resolve it w/out gov't.

Discuss how Great Depression 1930's tested 

Say's Law?

Class Notes 10/30/14

In 2 yrs. U.S. GDP dropped 27% -- nearly 1/3 of economy evaporated --> 1 in 4 were out of work before it ended

- lasted > 10 yrs. -- Prices were "sticky"

Huge unemployment

Production not operating @ full capacity

Long-run (time) did not help economy to correct

Classical theory - Say's Law failed