If I gave you 500 how much would

“ President Obama announces a second stimulus package that will inject $50 B in

Consumption & Savings MPC, MPS & Multiplier Analysis: Is a $600. 00 stimulus check

Consumption • Consumption is a function of disposable income (DI) DI C

Total effect: Dependent on MPC Marginal Propensity to Consume • If your income rises

Marginal Propensity to Consume MPC= Change in Consumption Change in Disposable Income MPC +

Marginal Propensity to SAVE MPS= Change in SAVINGS Change in Disposable Income MPC +

What does this mean? MPC + MPS = 1 I give you a $100

MULTIPLIER: Magnitude of shift of curve– all things remaining constant • $50 Billion “I”

Chain Reaction • Change in REAL GDP is a multiple of the size of

Multiplier Government Spending, Consumption and Investment Multiplier= 1 1 -MPC MPC=. 75 -- Multiplier

Power of the Spending/Consumption Multiplier “ President Obama announces a second stimulus package that

Power of the Tax Multiplier “ President Obama announces a second stimulus package that

Multipliers by Name Consumption and Investment Multiplier. Measures impact of spending by business and

The United States is currently experiencing a recession and the government increases spending by

Consumption Function • Autonomous Consumption – there is a minimum amount of consumption person…even

MPS = 1 (-) MPC What about “saving” some money?

Savings • Savings = DI – Consumption ( S = DI – C )

Savings Function • Autonomous Savings----Savings can be negative since consumption is never zero •

Marginal Propensity to Consume • Slope of the consumption function is the marginal propensity

Multiplier • Spending & investment have a “multiple” affect on GDP Government raises spending

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If I gave you $500 … how much would you spend and how much would you save?

“ President Obama announces a second stimulus package that will inject $50 B in additional funds for the Stimulus and Recovery Act. ”

Consumption & Savings MPC, MPS & Multiplier Analysis: Is a $600. 00 stimulus check really A $600. 00 stimulus check?

Consumption • Consumption is a function of disposable income (DI) DI C

Total effect: Dependent on MPC Marginal Propensity to Consume • If your income rises how much will you spend? • How much will you save? MPC = Change in consumer spending Change in disposable income

Marginal Propensity to Consume MPC= Change in Consumption Change in Disposable Income MPC + MPS = 1 Marginal…. if you get one more dollar how much of that extra dollar will you spend?

Marginal Propensity to SAVE MPS= Change in SAVINGS Change in Disposable Income MPC + MPS = 1 Marginal…. if you get one more dollar how much of that extra dollar will you spend?

What does this mean? MPC + MPS = 1 I give you a $100 (change in income) You save $50 and spend $50 MPC=. 50 MPS=. 50 +. 50 = 1 Marginal…. if you get one more dollar how much of that extra dollar will you spend?

MULTIPLIER: Magnitude of shift of curve– all things remaining constant • $50 Billion “I” from firms • Increase in DI to households – wages rise • Increase in “C” • Increase in output by firms • Increase in output– wages rise • Increase in “C” • & so on and so on • What is total effect of $50 B?

Chain Reaction • Change in REAL GDP is a multiple of the size of the initial change in spending: Multiplier = Total Increase in RGDP= $50 B x 1 1 -MPC If MPC is high (approaching 1) then multiplier is high…. .

Multiplier Government Spending, Consumption and Investment Multiplier= 1 1 -MPC MPC=. 75 -- Multiplier = 1 1 -. 75 =4 “ Congress announces a major increase in spending worth $100 B to increase AD”

Power of the Spending/Consumption Multiplier “ President Obama announces a second stimulus package that will inject $50 B in additional funds for the Stimulus and Recovery Act. ” If MPC is. 90 then how much growth will the $50 B in government spending create?

Power of the Tax Multiplier “ President Obama announces a second stimulus package that will cut taxes For individuals by a total of $20 billion. Expectation is that this tax cut will create large amounts of economic growth” If MPC is. 80 then how much growth will the $20 B in tax cuts create?

Multipliers by Name Consumption and Investment Multiplier. Measures impact of spending by business and individuals Government Spending Multiplier. Measures impact of spending by govt. BOTH OF THIS ARE CALCULATED THE SAME WAY: Multiplier = 1 1 - MPC Tax Multiplier- Measures impact of a tax cut Same formula as above but subtract 1 from your answer

The United States is currently experiencing a recession and the government increases spending by $50 Billion. If the MPC is. 75: • What is the multiplier? • What will the overall result on overall spending from the Govts increase?

Consumption Function • Autonomous Consumption – there is a minimum amount of consumption person…even if income is 0? • C = 40 +. 80 (DI) Disposable Income Consumption [C] Savings [S] 0 40 -40 100 120 -20 200 0 300 280 20 400 360 40 Autonomous Consumption Marginal Propensity Consume DI $100 => C $80

MPS = 1 (-) MPC What about “saving” some money?

Savings • Savings = DI – Consumption ( S = DI – C ) • MPS = ∆S / ∆ DI • MPC + MPS = 1 fraction of income consumed fraction of income saved Must be true because everything not saved is consumed: DI = C + S

Savings Function • Autonomous Savings----Savings can be negative since consumption is never zero • S = -40 +. 20 (DI) Disposable Income Consumption [C] Savings [S] 0 40 -40 100 120 -20 200 0 300 280 20 400 360 40 Autonomous Savings Marginal Propensity Save DI $100 => S $20

Marginal Propensity to Consume • Slope of the consumption function is the marginal propensity to consume (MPC) MPC = ∆C / ∆ DI

Multiplier • Spending & investment have a “multiple” affect on GDP Government raises spending $100 If MPC =. 80 PRODUCT Market Change in GDP: FIRMS HOUSEHOLDS FACTOR Market Round 1 $100. 0 Round 2 $80. 0 Round 3 $64. 0 Round 4 $51. 2 Etc…. .

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