Consumption and Saving and Multipliers

Disposable Income

• The income after taxes [Gross - Taxes]
• Consume or save (Spend or not spend)
• Consumption - Restricted by DI & propensity to save
• If DI = 0, autonomous consumption and dissaving

• Saving - Restricted by DI & propensity to consume
• If DI = 0, no saving

• APC/APS = Average propensity to consume/save
• APC + APC = 1
• 1 - APC = APS
• 1 - APS = APC
• -APS or when APC > 1 -> Dissaving

Multipliers

• MPC + MPS = 1
• MPC = 1- MPS
• MPS = 1 - MPC
• MPC
• Marginal ... Fraction of any change in DI consumed 
• (Change in Consumption/Change in DI)
• MPS
• Fraction of DI saved
• (Change in Saving/Change in DI)
• Spending Multiplier Effect
• Initial change in spending; causes larger change in AS or AD
• (1/(1-MPC)) or 1/MPS
• Multiplier = (Change in AD/Change in C, Ig, G, or Xn)
• Positive is increase; Negative is decrease
• Tax Multiplier
• Reverse multiplier because it leaves circular flow
• Tax cut is positive because money enters circular flow
• Always negative
• -(MPC/(1-MPC)) or -(MPC/MPS)
• Multiplier = (Change in AD/Change in C, Ig, G, or Xn)