Unit III: Consumption and Savings,DI, and Multipliers

Consumption and Savings

            Disposable Income (DI)

-Income after taxes or net income

-DI= gross income taxes

-Two options: to spend or save

-Two choices: with DI, households can either consume or save

Consumption

-Household spending

-The ability to consume is constrained by the amount of DI and the propensity to save

-Do households consume if DI=0?

Autonomous consumption

Saving

-Household NOT spending

- Ability of constrained by disposable income and propensity to consume

 Do households save if DI=0?

No, household do not save if DI=0

APC and APS

APC + APS= 1

1-APC= APS

1-APS= APC

APC <1= dissaving

-APS= dissaving

MPC

-Marginal propensity to consume- fraction of any change in disposable income that is consumed

MPC= change is consumption/ change in DI

MPS

-Marginal propensity to save- fraction of any charge is DI that is saved

-MPS= change is saving/ change is DI

Marginal Propensities

MPC + MPS =1

1-MPC=MPS

1-MPS= MPC

DI can be consumed or saved

Spending Multipliers

Initial Change in C, Ig, G, Xn in spending cause a large charge in aggregate spending or AD

Multiplier= change in AD/ change in C, Ig, G, Xn

Multiplier= 1/1-MPC or 1/MPS

+= increase in spending

-= decreasing in spending

Tax Multiplier

-When government taxes, multipliers work in reverse due to the money leaving the circular flow

 Tax multiplier= -MPC/1-MPC or -MPC/MPS

If there is a tax cut, then the multiplier is positive.