Disposable Income

*Disposable Income*
Is what you bring home
-Income after taxes or net income
DI = Gross income - Taxes
Two choices: with disposable income, households can either...

1. Consume (spend money on goods and services)
2. Save (not spend money on goods and services)

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

Average Propensity to Consume
-APC = C/Di = % of DI that is spent

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

Average Propensity to Save
-APS = S/DI = % of DI that is not spent

APC and APS:
APC + APS = 1    1 - APC = APS    1 - APS = APC
APC > 1  Dissaving          -APS Dissaving

Marginal Propensity to Consume
-MPC = ΔC/ΔDI  % of every dollar earned that is spent

Marginal Propensity to Save
-MPS = ΔS/ΔDI  % of every extra dollar earned that is saved

MPC + MPS = 1     1 - MPC = MPS     1 - MPS = MPC

The Spending Multiplier Effect:
-An initial change in spending causes a larger change in aggregate spending or aggregate demand
-Multiplier = Change in AD (ΔC, Ig, G, Xn) / Change in spending

Why does this happen?
-expenditures and income flow continuously which sets off a spending increase in the economy.

Calculating the Spending Multiplier: 
-Multiplier = 1/1-MPC or 1/MPS
     *Multiplier are positive when there is an increase in spending and negative when there is a decrease.
     *Spending multiplier can be calculated from the MPC or MPS
Calculating the Tax Multiplier:
-The government taxes the multiplier works in reverse. Why?
 Because now money is leaving the circular flow

Tax Multiplier (note: it is negative)
= -MPC/ 1-MPC or –MPC/MPS
-If tax cut, multiplier is positive because now money is in the circular flow.