Consumption, Saving, MPC, MPS, Multipliers

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Presentation transcript:

Consumption, Saving, MPC, MPS, Multipliers

Consumption Consumption (C) and disposable income (DI) are directly related C increases as DI rises but… The percentage of DI spent decreases as DI rises (more income means more savings) Taxes Increasing taxes leads to a decrease in disposable income causing a decrease in consumption

Saving Savings = DI - C Portion of your income you don't consume. Dissavings = consuming more than the available income

Determinants of Consumption and Saving Wealth = value of real assets (houses, cars) and financial assets (cash, savings, stocks, bonds) When wealth increases, households increase consumption and reduce savings Expectations about future prices and income Expectations of rising prices in the future will cause an increase in consumption and decrease in saving in the present Same for expectations of an increase in income Real Interest Rates When real interest rates fall, households borrow more, consume more, and save less When real interest rates rise, households borrow less, consume less, and save more

APC and APS APC+APS= 1 Average Propensity to Consume (APC) APC = Consumption/Disposable Income Total percentage of DI consumed Average Propensity to Save (APS) APS = Saving/Disposable Income Total percentage of DI saved APC+APS= 1

MPC and MPS MPC + MPS =1 Marginal Propensity to Consume (MPC) change in consumption/change in income the proportion of changes in DI consumed Marginal Propensity to Save (MPS) change in saving/change in income the proportion of changes in DI saved MPC + MPS =1

Multiplier Effect Shows that an initial change in spending (or taxes) can cause a larger change in output (GDP) The multiplier determines how much larger that change will be Change in GDP = multiplier x change in spending (or taxes) Spending (C,I,G,NX) multiplier = 1/ MPS Tax multiplier = - MPC/ MPS