Fiscal Policy Related Formulas:

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Presentation transcript:

Fiscal Policy Related Formulas: A. Average Propensity to Consume or APC: = Consumption divided by DI B. Average Propensity to Save or APS: = Savings divided by DI C. Marginal Propensity to Consume or MPC: = Change in Consumption divided by change in DI D. Marginal Propensity to Save or MPS: = Change in Savings divided by change in DI

E. Spending Multipliers = There are three types: 1. Government Spending or Investment Multiplier = 1/(1-MPC) or 1/MPS USED FOR AN INCREASE OR DECREASE IN G OR IG (or C or Xn). 2. Tax Multiplier for a Tax Increase: = -MPC/(1-MPC) or –MPC/MPS IF THERE IS A TAX DECREASE, JUST TAKE OUT THE NEGATIVE SIGN. 3. Balanced Budget Multiplier. Always equals one x change in government spending (whether a positive or negative change in G)