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Mr. Gerdes AP Macroeconomics

Mr. Gerdes AP Macroeconomics. Consumption & Saving. Disposable Income (DI). Income after taxes or net income DI = Gross Income - Taxes. 2 Choices. With disposable income, households can either Consume (spend money on goods & services) Save (not spend money on goods & services).

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Mr. Gerdes AP Macroeconomics

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  1. Mr. GerdesAP Macroeconomics Consumption & Saving

  2. Disposable Income (DI) • Income after taxes or net income • DI = Gross Income - Taxes

  3. 2 Choices • With disposable income, households can either • Consume (spend money on goods & services) • Save (not spend money on goods & services)

  4. 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 • APC = C/DI = % DI that is spent

  5. Saving • Household NOT spending • The ability to save is constrained by • The amount of disposable income • The propensity to consume • Do households save if DI = 0? • NO • APS = S/DI = % DI that is not spent

  6. APC & APS • APC + APS = 1 • 1 – APC = APS • 1 – APS = APC • APC > 1 .: Dissaving • -APS .: Dissaving

  7. MPC & MPS • Marginal Propensity to Consume • ΔC/ΔDI • % of every extra dollar earned that is spent • Marginal Propensity to Save • ΔS/ΔDI • % of every extra dollar earned that is saved • MPC + MPS = 1 • 1 – MPC = MPS • 1 – MPS = MPC

  8. Determinants of C & S • Wealth • Increased wealth .: Inc. C & Dec. S • Decreased wealth .: Dec. C & Inc. S • Expectations • Positive .: Inc C & Dec S • Negative .: Dec C & Inc S • Household Debt • High Debt .: Dec C & Inc S • Low Debt .: Inc C & Dec S • Taxes • Taxes Inc .: Dec C & Dec S • Taxes Dec .: Inc C & Inc S

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