Consumption & Saving

Disposable Income:

• Income after taxes (net income)
• DI = gross income - taxes
• One can only spend or save DI
• Consume: spend on goods and services
• Save: not spend

Consumption:

• Household spending 
• Ability to consume constrained by:

              - amount of disposable income
              - propensity to save

• Do households consume if DI = 0? -Autonomous Consumption

Saving:

• Household not spending 
• Ability to save constrained by:

              - amount of DI
              - propensity to consume

• Do they save if DI = 0? -No

APC & APS:

• APC + APS = 1 
• 1 - APC = APS
• 1- APS = APC
• APC < 1 = dissaving
• -APS = dissaving

Marginal Propensity to Consume (MPC):

• fraction of any change in DI consumed 

MPC = Δ consumption
                    Δ DI

Marginal Propensity to Save (MPS):

• fraction of any change in DI saved

MPS = Δ savings
                Δ DI

MPC + MPS = 1 

1 - MPC = MPS

1- MPS = MPC

Spending Multiplier Effect:

• initial change in spending (C+Ig+G+Xn) causes larger change in AD (ag. spending)

Multiplier =      Δ AD

                   Δ spending

Spending Multiplier = 1/MPS

• (+) when increase in spending
• (-) when decrease in spending

Tax Multiplier:

• when the government taxes, multiplier works in reverse because money leaves the circular flow chart

Tax Multiplier = -MPC/MPS

• Answer will always be negative (-)
• Unless it's a tax cut, then it will be (+) because there is more in the circular flow