1. Consumption Math Problems Warm-Up/Review  What are the three spending sectors?  Which one makes up the most of the GDP?  Use the dictionary to define the following: Propensity Average Marginal Disposable Income

2. Consumption Problems  Average Propensity to Consume (APC)  Average Propensity to Save (APS) =Demonstrates households tendencies  Marginal Propensity to Consume (MPC)  Marginal Propensity to Save (MPS) =Demonstrates change in households behavior when DI changes  Multiplier (M)  New GDP

3. Average Propensity to Consume (APC)  Definition: how much a person spends on average  Formula: = Consumption Disposable Income Example:  If C=$20,000 and DI=$30,000, find the APC.

4. Average Propensity to Save (APS)  Definition: how much a person saves on average  Formula: = Savings Disposable Income Example:  If S=$10,000 and DI=$30,000, find the APS.

5. Marginal Propensity to Consume (MPC)  Definition: the change in consumption when income changes  Formula: = Change in Consumption Change in DI Example:  Change in C is $30,000 and change in DI is $40,000  Find the MPC

6. Marginal Propensity to Save (MPS)  Definition: the change in savings when income changes  Formula: = Change in Savings Change in DI Example:  Change in S is $10,000 and change in DI is $40,000  Find the MPS

7. Multiplier  Definition: the # of times money is turned over (all spending generated by one dollar would add up to 4 or 5 times that dollar)  Affect on economy: Expands the money supply!  Formula: = 1 MPS Example:  What’s the Multiplier when MPS is o.2

8. New GDP  Definition: the change in GDP given the Multiplier and spending  Formula: =Initial GDP + (Multiplier x Change in Spending)  Example: What is New GDP when initial GDP is $9000, the Multiplier is 5 and Investment spending falls by 50? ************************

9. Wrap-Up: Answer the following questions in your own words  What does APC & APS tell us about people’s behavior and how the economy is doing?  What does MPC & MPS tell us about people’s behavior and how the economy is doing?  Why is it important to take the multiplier into account?  Why must we calculate New GDP?