Unit 3; Day 5- Consumption Spending and Saving

Disposable Income - Income after taxes or net income
DI= Gross income- Taxes
2 Choices
Consume(spend on goods and services)-
Household spending
The ability to consume constrained by- amount of DI, Propensity to save
Do households consume if DI=0? Autonomous Consumption
Save(Not spend on goods and services)-
Household NOT spending
Ability to save is constrained by- amount of DO, Propensity to consume
Do households save if DI=0? No

APC & APS
Consumption/DI= APC
APC + APS=1
1-APC= APS
1-APS=APC
APC>1~ Dissaving
Negative APS~ dissaving

Marginal Propensity to Consume (MPC)- Fraction of any change in DI that is consumed
=Δconsumption/ Δ DI
Marginal Propensity to Save (MPS)- Fraction of Change in DI that is saved
=Δ savings/ Δ DI
MPC+MPS=1
1-MPS= MPC
1-MPC=MPS (People can only consume or save Disposable income)

Tax Multiplier= -MPC/MPS
Govt Spending Multiplier= 1/MPS

The Spending multiplier Effect- An initial change in spending( C,Ig, G, Xn) causes a larger change in Aggregate spending(AS), or Aggregate Demand(AD)
Multiplier= Δ AD/ Δ spending

Calculating the Spending Multiplier- can be calc. from the MPC or MPS
Multiplier= 1/(1-MPC) or 1/MPS
Positive when there is increase in spending, negative when decrease

Calculating the Tax Multiplier- When Govt. taxes, multiplier works reverse. Why? Money is now leaving circular flow.
Tax multiplier(it is negative)= -MPC/(1-MPC) or -MPC/MPS
If there is a tax cut, multiplier is negative; more money in circular flow