AP Macroeconomics Consumption and Savings

Disposable Income ( Di)
.income after taxes or net income
.DI= gross income - taxes

2 choices
.with disposable income, households can either
-consume
-save

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
-dissaving

Saving
.household net saving
.the ability to save is constrained by
-the amount of disposable income
- the propensity to consume
.Do households save if Di=0?
-NO

APC and APS 

APC- average propensity to consume
APS- average propensity to save
APS+APC=1

Marginal Propensity to consume

. the fraction of any change in disposable income that is consumed
MPC= C/DI

Marginal Propensity to Save

. the fraction of any change in disposable income that is saved
MPS= S/DI

MPC+MPS=1
.only two options either to consume or to save

The spending multiplier effect

. An initial change in spending causes a larger change in aggregate spending
Multiplier= Change in AD/ Change in spending

Calculating the spending multiplier
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 the Tax multiplier
When the government taxed, the multiplier work in reverse because money is leaving the circular flow
Tax multiplier = -MPC/1-MPC or -MPC/MPS