Macroeconomics — Consumption, Saving, Investment, and the Multiplier – Flashcards
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What consumers have left over to spend or save once they have paid out their net taxes. DI = Gross Income - Net Taxes
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Disposable Income (DI)
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The consumption function tells us how much is consumed. C = b + k(DI) b: autonomous consumption
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Consumption Funtion
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The saving function tells us how much is saved. S = b + k(DI) b: autonomous saving
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Saving Function
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Change in consumption caused by a change in disposable income. MPC = Change in Consume / Change in Disposable Income = Slope of consumption function
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Marginal Propensity to Consume (MPC)
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Change in saving caused by a change in disposable income. MPC = Change in Saving / Change in Disposable Income = Slope of saving function
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Marginal Propensity to Save (MPS)
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MPC + MPS = 1
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Relationship Between MPC and MPS
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(1) Wealth (2) Expectations (3) Household debt (4) Taxes and transfers
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Determinants of Consumption and Saving
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MB: Expected Real Rate of Return (r) MC: Real Rate of Interest (i)
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Decision to Invest
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[In %] How much return you expect.
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Expected Real Rate of Return
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[In %] How much interested is imposed on you.
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Real Rate of Interest
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As the real interest rate falls, borrowing becomes less costly, and large investment projects become more attractive to firms. [Saving, lending]
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Demand for Loanable FUnds
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Comes from saving and lending on the part of households. [Investment, borrowing]
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Supply of Loanable Funds
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A change in any component of autonomous spending creates a larger change in GDP.
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Multiplier Effect
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1 / (1 - MPC) = 1 / MPS = Change in GDP / Change in Spending
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Spending Multiplier
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Taxes will have a smaller multiplier than government spending. Tax Multiplier = MPC x Spending Multiplier
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Multiplier of Tax
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The spending multiplier begins to works as soon as there is a change in autonomous spending (C, I, G, net exports), but the tax multiplier must first go through a person's consumption function as disposable income. In that first "round" of spending, some of those injected dollars are leakages in the form of savings.
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Why Tax Multiplier is Smaller than the Spending Multiplier
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Change in GDP / Change in Taxes = MPC * M = MPC / MPS
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Tax Multiplier
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Always equal to 1.
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Balanced-Budget Multiplier
