Consumption and Saving

Disposable Income(DI)
  -income after taxes or net income
2 choices:
-with disposable income households can either
  -consume(spend on goods and services)
  -save(not spend on goods and services.)
Consumption
-Household spending
-Ability to consume is constrained by
  -the amount of disposable income
  -the propensity to save
Do Households consume if DI=0
  -Autonomous consumption

Saving
-Household NOT Spending
-The ability to save is constrained by
  -The amount of disposable income
  -The propensity to consume
Do households save if DI=0?
 no

APC & APS
APC + APS = 1
1 - APC= APS
1 - APS = APC
APC > DISSAVING
-APS DISSAVING

MPC & MPS
marginal propensity to consume
  -△C/△DI
  -% of every extra dollar earned that is spent

marginal propensity to save
 - △S/△DI
 - % of every extra dollar earned that is saved

MPC+MPS=1
1-MPC=MPS
1-MPS=MPC

Marginal propensity to consume

MPC= △ in consumption
           ------------------------
           △ In disposable income

MPS= △ in savings
           -----------------------
           △ in disposable income

The spending multiplier effect
- an initial change in spending (C.IG, G , Xn) causes a larger change in aggregate spending or aggregate demand (AD)

Multiplier= △in AD/ △in spending

Multiplier= △S/△C,Ig,G,Xn

Why does this happen?
-expenditures and income flow continuously which sets off a spending increase in the economy.

Calculating Spending multiplier
-can be calculated from MPC or MPS

Multiplier= 1/1 - MPC  OR  1/MPS

-multipliers are + when theres an increase in spending and - when there is a decrease.

How to calculate tax multiplier
-when government taxes, the multiplier works in reverse.
Why?
- because money is leaving circular flow.
Tax Multiplier (note: its negative)
= -MPC/1 - MPC or -MPC/MPS
If there is a tax CUT then multiplier is + because there's more money in circular flow.