Unit 3: Notes and Need-To-Knows 2.20.15

Disposable Income (DI):
Households can either consume or save their Disposable Income.
DI is money left after taxes from Gross Income

• 
  
• Consumption:

Ability to consume is constrained by amount of disposable income a household makes and 
their propensity to save.
Do households consumer if DI = 0? Yes, due to autonomous consumption.

• APC = C / DI = % DI that is spent

          
Savings:
Household is not spending
Ability to save is constrained by amount of disposable income and propensity to consume.
Do household save if DI = 0? Nope.
APS = S / DI = % DI that is not spent
          
APC & APS:
APC + APS = 1
APC > 1 = Dissavings

Marginal Propensity to Consume:
Change in C / Change in DI
Percent of every extra dollar earned that is spent

Marginal Propensity to Save:
Change in S / Change in DI
Percent of every extra dollar earned that is saved

Spending multiplier Effect:
Initial change in spending causes larger change in aggregate spending or aggregate demand
Multiplier = Change in AD / Change in Spending
Why? Expenditures and Income Flow increase spending

Calculating Spending Multiplier:
Multiplier = 1 / (1 - MPS) or MPC

Calculating Tax Multiplier:
Multiplier = -MPC / (1 - MPC) or MPS
Why? More money leaving flow.
Tax cuts are positive.