Saving, MPC, MPS, APC, AND Multipliers

Saving

• When household is NOT spending
• The ability to save isome constrained by :

        - The amount of disposable income

        - The propensity to consume

Do households save if DI = 0

   Answer: NO

Average Propensity to Consume (APC)

Average Propensity  to Save(APS)

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

Marginal Propensity to Consume (MPC)

• Fracation of any change in disposabless income that is consumed
• MPC = change in consumption ÷ change in disposable income 

Marginal Propensity to Save (MPS)

• Fraction of any change in disposable inco,email that is saved
• MPS = change in savings ÷ change in disposable income

MPC +MPS =1

MPC = 1-MPS

MPS = 1- MPC

PEOPLE DO TWO THINGS WITH DISPOSABLE INCOME  :  CONSUME OR SAVE

Spending Multiplier Effect

• An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand
• Multiplier : change in AD ÷ change in spending

Calculating spending multiplier

• Can be calculated from MPC OR MPS
• Multiplier = 1÷ (1-MPC) OR 1÷MPS
• multipliers are positive when  there is an increase in spending and negative when there is a decrease

Calculating tax multiplier 

• When government taxes, the multiplier works in reverse because now money is leaving the circular flow
• -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

MPC, MPS, MULTIPLIER CALCULATIONS

APS