-Disposable Income (DI): income after taxes or net income
*Formula: DI = Gross Income - Taxes
*Two Choices:
1. Consume (spend money on goods or services)
2. Save (not spend money on goods or services)
-Consumption (C): household spending
*the ability to consume is constrained by:
-the amount of disposable income
-propensity to save
*Do households consume if DI = 0?
-autonomous consumption
-dissaving
* APC = C / DI : % of DI that is SPENT
-APC: Average Propensity to Consume
-C: Consumption
-DI: Disposable Income
-Saving: households 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
*APS = S / DI : % DI that is NOT spent
-APS: Average Propensity to Save
-S: Saving
-DI: Disposable Income
APC and APS
-Formulas:
*APC + APS = 1
*1 - APS = APC
*APC > 1 : Dissaving
*-APS : Dissavings
MPC and MPS
-Marginal Propensity to consume (MPC):
*Δ in C/ Δ in DI
*% of every extra dollar earned that is spent
-Marginal Propensity to Save (MPS):
*Δ in S/ Δ in DI
*% of every extra dollar earned that is saved
-Formulas:
*MPC + MPS = 1
*1 - MPC = MPS
*1 - MPS = MPC
Determinants of C and S
-Wealth
-Expectations
- Household Debt
-Taxes
Spending Multiplier Effect
-Initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending, or Aggregate Demand (AD)
-Multiplier = Δ in AD/ Δ in spending
-Multiplier = Δ in AD/ Δ in C, Xn, G, Ig
-Why does this happen?
*Expenditures and Income flow continuously which sets off a spending increase in the economy
-Calculating the Spending/Investment/Government Spending Multiplier:
*Multiplier = 1 / (1 - MPC) or 1 / MPS
*Multipliers are (+) when there is an increase in spending and (-) when there is a decrease
-Calculating Tax Multiplier:
*-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
PRACTICE PROBLEM
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