consumption and saving

Consumption and saving

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• Disposable income- anything you have left after you pay your bills. Income after taxes.
• DI=gross income - taxes
• Two choices- spend or save
• Consumption- constrained by:
• Amount of disposable income
• Propensity to save
• Do households consume when DI=0?
• Yes, autonomous consumption
• Dissaving
• APC = C/DI = % DI that spent
• Saving
• Household not spending
• Ability to save constrained by:
• Amount of DI
• Propensity to consume
• Cannot save W/o DI
• APS = S/DI = % DI that is not spent
• APC (+) APS = 1
• 1 (-) APS = APC
• 1 (-) APC = APS
• APC > 1: dissaving
• -APS: dissaving
• Marginal propensity to consume:
• Change in consumption / change in DI
• % of every extra $ earned that is spent
• Marginal propensity to consume:
• Change in saving / change in DI
• % of every extra $ that is saved
• MPC (+) MPS = 1
• 1 (-) MPC = MPS
• 1 (-) MPS = MPC
• determinants of C & S
• Wealth
• Expectations
• Household debt
• Taxes
• Spending multiplier effect:
• Initial change in spending (C, IG, G, Xn) causes a change in larger change in AD
• Multiplier = change in AD / change in spending
• Multiplier = change in AD / change in C, IG, G, Xn
• Why does this occur?
• Expenditures and income flow continuously which sets off a spending increase in the economy
• Spending multiplier can be found from MPS or MPC
• Multiplier = 1/ 1 - MPC OR 1/MPS
• Multipliers are (+) when there is an increase in spending.
• Multipliers are (-) in decrease
• When the gov’t taxes, the multiplier works in reverse because how money is leaving the circular flow
• -tax multiplier = - MPC / 1 - MPC  OR -MPC / MPS
• If there is a tax cut then the multiplier is positive because there is now more money in the circular flow