UNIT V STUDY GUIDE
Aggregate Expenditure and
Course Learning Outcomes for Unit V
Upon completion of this unit, students should be able to:
5. Construct the aggregate expenditure and demand model of the macro economy.
Chapter 9: Aggregate Expenditure and Aggregate Demand
Chapter 10: Aggregate Supply
Savings Rates in China: Why the Big Difference, and What are the Implications?
In our lesson for Unit V, we study aggregate demand. Have you considered the rate of savings for various
countries and the possible implications? After 20 years of going down, the personal saving rate in the United
States has increased from the start of the latest “recession,” and one needs to consider what may happen
during the recovery. The “Empirical Analysis of the Saving Rate in the United States” is quoted below:
The U.S. saving rate has historically been much lower relative to the saving rate of Japan and the 12
nations that make the Euro-zone. For example, between 2000 and 2004 the Euro-zone countries
saved 10.5% of their disposable income while Japanese saved 6% of theirs. The saving rate for the
U.S. over the same period was only 3.2%. In fact, it was consumers who carried the U.S. economy
out of recession in the 80s and 90s and for over two decades United States was known to be a nation
of "shop until you drop." Since the early 1980s U.S. personal saving rate declined steadily from a high
of 10.9 percent in 1982 to a low rate of 1.4 percent in 2005. This downward trend represented a
dramatic change in the behavior of personal saving rate because during the preceding three decades,
the personal saving rate had experienced an upward trend. While in the 1950s the average personal
saving rate was 7.94 percent, the 1960s and 1970s had witnessed the average personal rates climb
to 8.29 and 9.59 percent, respectively. More recently, however, and especially around the onset of
the 2007 recession, dubbed the "Great Recession," personal saving rate seems to have staged a
turnaround. It climbed systematically, registering at 2.1, 4.1, 5.9, and 5.7 percent for 2007, 2008,
2009, and 2010 respectively. (Amavati, Adilov, & Dilts, 2013, para. 3)
What is even more curious is to examine the savings rate in China over the same time. How might someone
explain that the Chinese have had the highest savings rate? These savings rates have attracted much
research to explain the possible implications. China has achieved savings in recent years of 50% and before
that averaged 40% (Eckaus, 2014). Might you be astounded? Why might the Chinese consumers be saving,
while the U.S. consumer is credited for spending its, and much of the world’s, way out of a recession?
Often the U.S. is criticized for saving too little collectively, while the Chinese are criticized for spending too
little. As one examines aggregate spending, which is opposite of aggregate savings, this means that Chinese
consumers have a declining rate of consumption. This is contrary to the stated Chinese government’s wish,
as stated by economists and the government, to increase consumption.
There is the argument that there is a “forced” savings system in China, as noted by government programs
that reward investment by taxation policy and economic structures, such as lending rates that encourage
investment and not consumer spending. In China, government retirement programs are set up to reward
contribution, and this an indirect savings tool. Another way that savings are encouraged is by the non-
BBA 2401, Principles of Macroeconomics
distribution of corporate profits. Profits are being reinvested and not returned to
The policy of
x STUDY GUIDE
the banking system is to encourage loans for reinvestment and not loans to individuals.
Which is better, the low savings rate and high consumption of the U.S., or the low consumption and high
savings rate of China? As budding economists, we will let you decide. The key is to become informed and
note the various trade-offs that are necessary. Government, with the advice of economists, must decide
economic policy that creates the most good for everyone. After leaving this course, be aware of these tradeoffs as you work and as you participate as a voter.
Amavati, H., Adilov, N., & Dilts, D. A. (2013). Empirical analysis of the saving rate in the United States.
Journal of Management Policy and Practice, 14(2), 46-53. Retrieved from http://www.nabusinesspress.com/JMPP/SamavatiH_Web14_2_.pdf
Eckaus, R. S. (2014). Forced saving in china. The China Quarterly, 217, 180-194.
Click here for the Chapter 9 Presentation in PowerPoint form. Click here to access a PDF version of the
Click here for the Chapter 10 Presentation in PowerPoint form. Click here to access a PDF version of the
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit
them. If you have questions, contact your instructor for further guidance and information.
Review the online tutorial below [link to MyCourseTools tutorial of same name], which focuses on specific
topics in Unit V.
BBA 2401, Principles of Macroeconomics
1. (Consumption) Use the following data to answer the questions below:
Disposable Income (Billions)
(A). Graph the consumption function, with consumption spending on the vertical axis and
disposable income on the horizontal axis.
(B). If the consumption function is a straight line, what is its slope?
(C). Fill in the saving column at each level of income. If the saving function is a straight line,
what is its slope?
4. (Consumption Function) How would an increase in each of the following affect the
(A). Net Taxes
(B). The Interest Rate
(C). Consumer Optimism, or Confidence
(D). The Price Level
(E). Consumer’s Net Worth
(F). Disposable Income
9. (Simple Spending Multiplier) For each of the following values for the MPC, determine
the size of the simple spending multiplier and the total change in real GPD demanded following
a $10 billion decrease in spending:
(A). MPC = 0.9
(B). MPC = 0.75
(C). MPC = 0.6
3. (Expansionary and Recessionary Gaps) Answer questions A through F on the
basis of the following graph:
(A). If the actual price level exceeds the expected price level reflected in long-term
contracts, real GDP equals ______ and the actual price level equals _____ in the short run.
(B). The situation described in part (A) results in a(n) _____ gap equal to ______.
(C). If the actual price level is lower than the expected price level reflected in longterm contracts, real GDP equals _____ and the actual price level equals _____ in the short
(D). The situation described in part (C) results in a(n) _____ gap equal to _____.
(E). If the actual price level equals the expected price level reflected in long-term
contracts, real GDP equals _____ and the actual price level equals ______ in the short run.
(F). The situation described in part (E) results in a(n) _____ gap equal to _____.
5. (Changes in Aggregate Supply) List three factors that can change the economy’s
potential output. What is the impact of shifts of the aggregate demand curve on potential output?
Illustrate your answers with a diagram.
6. (Supply Shocks) Give an example of an adverse supply shock and illustrate
graphically. Now do the same for a beneficial supply shock.
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