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Consumption Math Problems Warm-Up/Review What are the three spending sectors? Which one makes up the most of the GDP? Use the dictionary to define the following: Propensity Average Marginal Disposable Income

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Consumption Problems Average Propensity to Consume (APC) Average Propensity to Save (APS) =Demonstrates households tendencies Marginal Propensity to Consume (MPC) Marginal Propensity to Save (MPS) =Demonstrates change in households behavior when DI changes Multiplier (M) New GDP

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Average Propensity to Consume (APC) Definition: how much a person spends on average Formula: = Consumption Disposable Income Example: If C=$20,000 and DI=$30,000, find the APC.

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Average Propensity to Save (APS) Definition: how much a person saves on average Formula: = Savings Disposable Income Example: If S=$10,000 and DI=$30,000, find the APS.

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Marginal Propensity to Consume (MPC) Definition: the change in consumption when income changes Formula: = Change in Consumption Change in DI Example: Change in C is $30,000 and change in DI is $40,000 Find the MPC

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Marginal Propensity to Save (MPS) Definition: the change in savings when income changes Formula: = Change in Savings Change in DI Example: Change in S is $10,000 and change in DI is $40,000 Find the MPS

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Multiplier Definition: the # of times money is turned over (all spending generated by one dollar would add up to 4 or 5 times that dollar) Affect on economy: Expands the money supply! Formula: = 1 MPS Example: What’s the Multiplier when MPS is o.2

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New GDP Definition: the change in GDP given the Multiplier and spending Formula: =Initial GDP + (Multiplier x Change in Spending) Example: What is New GDP when initial GDP is $9000, the Multiplier is 5 and Investment spending falls by 50? ************************

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Wrap-Up: Answer the following questions in your own words What does APC & APS tell us about people’s behavior and how the economy is doing? What does MPC & MPS tell us about people’s behavior and how the economy is doing? Why is it important to take the multiplier into account? Why must we calculate New GDP?

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