Disposable Income- Income after taxes or net income

DI= Gross Income- Taxes


2 choices w/ DI
Consume or Save

Consumption
Household spending
The ability to consume is contracted by
-the amount of disposable in.
-the propensity to save
Do households consume if DI=0
-Autonomous Consumption
-Dissaving
APC= C/DI that is spent saving

Saving
-Household not spending
-the ability to save is constrained by amount of disposable income
-the propensity to consume
Do households save if DI=0? No

APS =S/ DI= DI that is not spent

APC and APS
APC & APS= 1
1-APC= APS
1-APS=APC

APC >1- Dissaving
-APS: Dissaving

MPS & MPC

-Marginal propensity to consume
change in consumption/ change in disposable income
-% of every extra dollar earned that is spent

-Marginal Propensity to Save
-change in savings/ change in disposable income
-% of every extra dollar earned that is saved
MPC+MPS= 1
1-MPC= MPS
1-MPS= MPC

Determinants
-expectations
-household debt
-taxes


Spending Multiplier Effect
 An initial change in spending causes a larger change in aggregate spending or aggregate demand.

Multiplier= Change in AD/ Change in spending


Expenditures an income flow continuously which sets off a spending increases in the economy.

Spending Multiplier= 1/1-MPC or 1/MPS

Multipliers are pos. w increase of spending and neg. when there is a decrease.


Tax multiplier
- always negative, works in reverse
-MPC/1-MPC or -MPC/MPS

if there is a tax cut then the multiplier is pos.

Reason Prices might be sticky in a downward sloping direction
-menu costs
-price war
-wage contrasts
-minimum wage
-morale, effort, and productivity