Mr. Mayer AP Macroeconomics Consumption & Saving.

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Presentation transcript:

Mr. Mayer 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 – 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 – 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