Chapter 11 is entitled “The Short-Run Macro Model”. The definition of the short-run
macro model is a macroeconomic model that explains how changes in spending can affect
real GDP in the short run. In many ways, the short run macro model’s perspective of the
economy is opposite of the classical model. The chapter begins by taking a look at
consumption spending. To determine ones consumption spending, one must first look at
disposable income. It is important to note that disposable income is different than income.
Disposable income is ones income plus transfers received (unemployment, social security)
minus taxes. This can also be written as disposable income = income – net taxes, because
net taxes equals taxes – transfers. Consumption spending is also determined by wealth, or
total value of household assets, the interest rate, and expectations. Consumption spending
will increase when the disposable income rises, wealth rises, the interest rate falls, or
households become more optimistic about the future. However, the most stable and
important determinant of consumption spending is income. To display the relationship
between income and consumption spending, economists use the consumption function.
The consumption function is defined as a positively sloped relationship between real
consumption spending and real disposable income. Autonomous consumption spending is
important too. It is defined as the part of consumption spending that is independent of
income; also the vertical intercept of the consumption function. The slope of the displays is
important as well. The formula for the slope is Δ Consumption divided by Δ Disposable
