for current consumption, so their MPC is small Expectations about future income are reflected in autonomous consumption. MPC + MPS = 1 ➢The fraction of any income change not consumed is saved MPC and MPS as slopes ➢MPC: numerical value of the slope of the consumption schedule ➢MPS: numerical value of the slope of the saving schedule Non-income determinants of consumption and savings ➢Wealth effect ➢Expectations ➢Real interest rates ➢Household debt Exogenous Consumption and Saving ➢C0= Exogenous C when Y = 0 ➢C = C0+c1Yd➢S0= Exogenous savings oS0= - C0oExogenous C is assumed to be drawn from previous savings and is thus represented as dissaving’s➢S = -C0 + (1-c1)YdThe multiplier effect The total change in output can be greater than the initial change in aggregate demand. This is because of the circular flow of expenditure, income, and output

????𝑖??𝑖?? =?ℎ???? 𝑖? ???? 𝐺?𝑃𝑖??𝑖?𝑖?? ?ℎ???? 𝑖? ?????𝑖??➢Concerns the relationship between changes in spending and that of real GDP ➢An increase in initial (exogenous) spending may lead to a multiple increase in real GDP and similarly, a decrease in autonomous (exogenous) spending may result in a larger decrease in real GDP ➢The initial change in autonomous (exogenous) spending is frequently associated with investment spending as a result of its volatility It stems from two facts ➢The economy supports repetitive, continuous flows of expenditures and income through which Rands spent by X are received as income by Y. ➢Any change in income will vary both consumption and saving in the same direction as , and by fraction of , the change in income. The Multiplier and the Marginal Propensities ????𝑖??𝑖?? = 11 − ?𝑃?????𝑖??𝑖?? =1?𝑃?Interest Rate and Investment Expected rate of return (r)➢Not guaranteed rate of return The real interest rate (i)➢Nominal interest rate –inflation rate ➢Matters for investment decisions Meaning of r = i➢Firms undertake investment decisions up until this point and not where ris below i. Investment demand curve ➢Constructed by arraying all potential ➢investment projects in descending order of their expected rates of return

Shifts in the Investment Demand Curve Consumption and Investment Simplifications ➢Private Closed Economy ➢Planned Investment ➢Investment Schedule Equilibrium GDP: ➢? + 𝐼 = 𝐺?𝑃➢? = ? + 𝐼➢? = ?0+ ?1??+ 𝐼➢Real Domestic Output (Yd) ➢Aggregate Expenditures (Y) oAggregate Expenditures Schedule ➢Equilibrium GDP ➢Disequilibrium The multiplier process Fall in investment →fall in aggregate demand →lower output and income →further fall in demand and income →new equilibrium (Z)