1. Consumption, Saving, MPC, MPS, Multipliers

2. Consumption
Consumption (C) and disposable income (DI) are directly related
C increases as DI rises but…
The percentage of DI spent decreases as DI rises (more income means more savings)
Taxes
Increasing taxes leads to a decrease in disposable income causing a decrease in consumption

3. Saving Savings = DI - C Portion of your income you don't consume.
Dissavings = consuming more than the available income

4. Determinants of Consumption and Saving
Wealth = value of real assets (houses, cars) and financial assets (cash, savings, stocks, bonds)
When wealth increases, households increase consumption and reduce savings
Expectations about future prices and income
Expectations of rising prices in the future will cause an increase in consumption and decrease in saving in the present
Same for expectations of an increase in income
Real Interest Rates
When real interest rates fall, households borrow more, consume more, and save less
When real interest rates rise, households borrow less, consume less, and save more

5. APC and APS APC+APS= 1 Average Propensity to Consume (APC)
APC = Consumption/Disposable Income
Total percentage of DI consumed
Average Propensity to Save (APS)
APS = Saving/Disposable Income
Total percentage of DI saved
APC+APS= 1

6. MPC and MPS MPC + MPS =1 Marginal Propensity to Consume (MPC)
change in consumption/change in income
the proportion of changes in DI consumed
Marginal Propensity to Save (MPS)
change in saving/change in income
the proportion of changes in DI saved
MPC + MPS =1

7. Multiplier Effect
Shows that an initial change in spending (or taxes) can cause a larger change in output (GDP)
The multiplier determines how much larger that change will be
Change in GDP = multiplier x change in spending (or taxes)
Spending (C,I,G,NX) multiplier = 1/ MPS
Tax multiplier = - MPC/ MPS