Step 19: Multiplication

Disposable Income (DI)

-Income after taxes; "net income"

-Formula: DI = Gross Income - Taxes

You can either:

• Consumer - spend money on goods and services
• Save - not spend money on goods and services

Consumption (household spending)

-The ability to consume is constrained by:

Amount of DI

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 in constrained by:

Amount of DI

Propensity to consume

-Do household save if DI = 0?

No

-APS: S/DI = % DI that is not spent

APC and APS (Average Propensity to Consume/Save)

-APS+APC = 1

-1-APC = APS

-1-APS = APC

-APC > 1.: Dissaving

-(-APS) .: Dissaving

MPC and MPS (Marginal Propensity to Consume/Save)

-MPC

Change in C/Change in DI

% of every extra dollar earned that is spent

-MPS

Change in S/Change in DI

% of every extra dollar earned that is saved

-MPC+MPS = 1

-1-MPC = MPS

Spending Multiplier Effect

-an initial change in spending (C, Ig, G, and Xn) causes a larger change in AS or AD

-Multiplier = change in AD/change in C, Ig, G, or Xn

WHY?

-Expenditures and income flow continuously which sets off a spending increase in the economy

-Formula: 1/1-MPC or 1/MPS

-Multipliers are positive where there is an increase in spending and negative when there is a decrease

Tax Multiplier

-when the government taxes, the multiplier works in reverse because money leaves circulation

-is always negative

-Formula: = -MPC/1-MPC or -MPC/MPS

-if there is a tax cut, the tax multiplier is positive because there is more money in circulation