Consumption
-Household spending
-The ability to consume is constrained by
-The amount of disposable income
-The propensity to save
-Do households consume if DI = 0?
-Autonomous consumption
-Dissaving
Saving
-Household NOT spending
-The ability to save is constrained by
-The amount of disposable income
-The propensity to consume
-Do households save if DI = 0?
-No
APC & APS (Average Propensity to Consume & Average Propensity to Save)
-APC + APS = 1
-1 – APC = APS
-1 – APS = APC
-APC > 1 = Dissaver
-–APS = Dissaver
MPC & MPS
-Marginal Propensity to Consume
-Change in consumption / change in disposable income
-% of every extra dollar earned that is spent
-Marginal Propensity to Save
-Change in saving / change in disposable income
-% of every extra dollar earned that is saved
-MPC + MPS = 1
-1 – MPC = MPS
-1 – MPS = MPC
Determinants of C & S
-Wealth
-Expectation
-Household Debt
-Taxes
MPC, MPS & Multipliers
-The Spending Multiplier Effect
-An initial change in spending (C, IG, G, Xn) causes a large change in aggregate spending or
Aggregate Demand (AD).
-Multiplier = change in AD / change in spending
-Multiplier = change in AD / change in C, I, G, or Xn
-Why does it happen?
-Expenditures and income flow continuously which sets off a spending increase in the economy.
Calculating the Spending Multiplier
-The spending multiplier can be calculated from the MPC or the MPS
-Multiplier = 1/1-MPC or 1/MPS
-Multipliers are (+) when there is an increase in spending and (-) when there is a decrease
Calculating the Tax Multiplier
-When the government taxes, the multiplier works in reverse
-Why?
-Because now money is leaving the circular flow
-Tax Multiplier (note: it’s negative)
-= -MPC / 1-MPC or –MPC / MPS
-If there is a tax cut, then the multiplier is +, because there is now, more money in the circular flow
MPC, MPS & Multipliers
-The Spending Multiplier Effect
-An initial change in spending (C, IG, G, Xn) causes a large change in aggregate spending or
Aggregate Demand (AD).
-Multiplier = change in AD / change in spending
-Multiplier = change in AD / change in C, I, G, or Xn
-Why does it happen?
-Expenditures and income flow continuously which sets off a spending increase in the economy.
Calculating the Spending Multiplier
-The spending multiplier can be calculated from the MPC or the MPS
-Multiplier = 1/1-MPC or 1/MPS
-Multipliers are (+) when there is an increase in spending and (-) when there is a decrease
-When the government taxes, the multiplier works in reverse
-Why?
-Because now money is leaving the circular flow
-Tax Multiplier (note: it’s negative)
-= -MPC / 1-MPC or –MPC / MPS
-If there is a tax cut, then the multiplier is +, because there is now, more money in the circular flow
Love your background. Your notes are easy to follow and find. But what would tie it all together would be some videos. Also some example problems for Tax multiplier
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