(2-25-16) Unit III Consumption and Saving Multipliers

Consumption and Saving Multipliers

Disposable income

income after taxes [Gross-Taxes]

Consume or save [spend or not to spend]

Consumption - restricted by DI & Propensity to save

-If DI = 0, autonomous consumption and dissaving [occurs]

-Saving - Restricted by DI & Propensity to consume

-if DI = 0, no saving [occurs]

-APC/APS = Average Propensity to Consume/Save

APC + APC = 1

1 - APC = APS

1 - APS = APC

-APS or when APC > 1 -> Dissaving

Multipliers

MPC + MPS = 1

MPC = 1 - MPS

MPS = 1 - MPC

-MPC

marginal.. fraction of any change in DI consumed [change in Consumption/change in Di]

-MPS

Fraction of DI saved [change in Saving/change in DI]

-Spending Multiplier Effect

Initial change in spending; causes larger change in AS or AD

(1/[1-MPC]) or 1/MPS

Multiplier = (change in AD/change in C, Ig, G, or Xn)

Positive= increase; Negative= decrease

-Tax Multiplier

Reverse multiplier because it leaves circular  flow

Tax cut is positive because money enters circular flow

Always negative

-(MPC/[1-MPC]) or -(MPC/MPS)

Multiplier = (change in AD/change in C, Ig, G, or Xn)