CONSUMPTION & SAVINGS

DISPOSABLE INCOME(DI)

-Income after taxes or net income.
-DI = gross income -taxes.
-With disposable income, households can either:
 *Consume(spend money on goods & services)
 *Save(spend money on goods &services).

CONSUMPTION

-Household spending
-The ability to consume is constrained by:
 *The amount of disposable income.
 *The propensity to save.
-Do household consume if DI=0.
 *Autonomic consumption
 *Dis saving.

SAVING

-Households not spending.
-The ability to save is constrained by:
 *The amount of disposable income.
 *The propensity of disposable income.
-Do households save if DI=0.
 *No.

APC &APS(AVERAGE TO CONSUME/SAVE)

-APC+APS = 1.
-1- APC = APS.
-1- APS = APC.
-APC >1: Dis saving.
-(-APS): Dis saving.

MPC(MARGINAL PROPENSITY TO CONSUME)

-The fraction of any change in-disposable income that is consumed.
-MPC = change in consumption/ change in disposable income.

MPS(MARGINAL PROPENSITY TO SAVE)

-The fraction of any change in disposable income that is saved.
-MPS = change in savings/ change in disposable income.

MARGINAL PROPENSITIES

-MPC +MPC =1.
 *MPC = 1- MPS.
 *MPS = 1- MPC.
-Remember, people do two things with their disposable income, consume or save it.

SPENDING MULTIPLIER EFFECTS

-An initial change in spending(C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate  demand.
-Multiplier = change in AD/ change in spending.

CALCULATING SPENDING MULTIPLIER

-The spending multiplier can be calculated from the MPC or MPS.
-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

-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- MPS or -MPC/MPS.
-If there is a tax cut, then the multiplier is (+), because there is now more money in the circular flow.