Mr. Rupp AP Macroeconomics

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Presentation transcript:

Mr. Rupp AP Macroeconomics Consumption & Saving

Disposable Income (DI) Income after taxes or net income DI = Gross Income - Taxes

2 Choices With disposable income, households can either Consume (spend money on goods & services) Save (not 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 households consume if DI = 0? Autonomous consumption Dissaving APC = C/DI = % DI that is spent

Saving Household 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

APC & APS APC + APS = 1 1 – APC = APS 1 – APS = APC APC > 1 .: Dissaving -APS .: Dissaving

MPC & MPS Marginal Propensity to Consume Marginal Propensity to Save ΔC/ΔDI % of every extra dollar earned that is spent Marginal Propensity to Save ΔS/ΔDI % of every extra dollar earned that is saved MPC + MPS = 1 1 – MPC = MPS 1 – MPS = MPC

Determinants of C & S Wealth Expectations Household Debt Taxes Increased wealth .: Inc. C & Dec. S Decreased wealth .: Dec. C & Inc. S Expectations Positive .: Inc C & Dec S Negative .: Dec C & Inc S Household Debt High Debt .: Dec C & Inc S Low Debt .: Inc C & Dec S Taxes Taxes Inc .: Dec C & Dec S Taxes Dec .: Inc C & Inc S