Unit 3 (2/20/15) consumption and savings

Disposable income (DI)
-Income after taxes or net income.
-DI = gross income multiplied by taxes.
     2 choices...
1. Consume (spend $ on goods and services)
2. Save (not spend money on goods and 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
-Dis-saving
       APC = C / DI = % DI is spent

     Saving
  Household not spending.
The ability to save is considered by...
-The amount of disposable income.
-The propensity to consume.
  Do households save if DI = 0?
-No.
          APS = S / DI = % DI is not spent


APC and APS
* APC + APS = 1
* 1 - APC = APS
* 1 - APS = APC
* APC > 1.: Dis-saving
* -APS.: Dis-saving

     Marginal propensity to consume.
* ΔC / ΔDI
* % of every dollar earned that is spent
     Marginal propensity to save.
* ΔS / ΔDI 
* % of every extra dollar earned that is saved.
      The spending Multiplier effect.
An initial change in spending ( C, Ig, G, and Xn) causes a larger change in aggregate spending, or aggregate demand (AD)

* Multiplier = Change in AD / Change in spending

* Multiplier = Change in AD / Δ C, Ig, G, or Xn

Why does this happen?
-Expenditures and income flow continuously, which sets off a spending increase in the economy.
-The spending multiplier can be calculated from the MPC or the MPS

* Mulitplier = 1 / 1 - MPC or 1 / MPS

  Multipliers are positive when there is an increase in spending and negative if there is a decrease in  spending.

     Calculating the tax multiplier
When government taxes, the multiplier works in reverse.
Why?
- Because now money is leaving the circular flow.
 
* Tax Multiplier  (negative) = -MPC / 1 - MPC or -MPC / MPS.

If there is a tax cut, then the multiplier is positive, because there is more money in the circular flow now.