MPC, MPS, and Multipliers

oppositemincedΔιαχείριση

28 Οκτ 2013 (πριν από 4 χρόνια και 13 μέρες)

227 εμφανίσεις

AP Macroeconomics

MPC, MPS, and
Multipliers

MPC & MPS


Marginal Propensity to Consume


% of every extra dollar earned that is spent


ΔC/ΔDI


Marginal Propensity to Save


% of every extra dollar earned that is saved


ΔS/ΔDI


MPC + MPS = 1


1


MPC = MPS


1


MPS = MPC



Marginal Propensity to Consume (MPC)


The fraction of any change in disposable
income that is consumed.



MPC=
Change in Consumption


Change in Disposable Income


MPC =
ΔC
/
ΔDI


Marginal Propensity to Save (MPS)


The fraction of any change in disposable
income that is saved.



MPS=
Change in Savings

Change in Disposable Income



MPS =
ΔS
/
ΔDI



Marginal Propensities


MPC + MPS = 1


.: MPC = 1


MPS


.: MPS = 1


MPC


Remember, people do two things
with their disposable income,
consume it or save it!

The Spending Multiplier Effect


An initial change in spending (C, I
G
, G, X
N
)
causes a larger change in aggregate
spending, or Aggregate Demand (AD).




The Spending Multiplier Effect


Why does this happen?


Expenditures and income flow
continuously which sets off a
spending increase in the economy.

The Spending Multiplier Effect


Ex. If the government increases defense
spending by $1 Billion, then defense
contractors will hire and pay more
workers, which will increase aggregate
spending by more than the original $1
Billion.


Calculating the Spending Multiplier


Multiplier =
Change in
AD or GDP




Change in
Spending

Desired change in GDP=change
in spending*multiplier



The Spending Multiplier can be calculated
from the MPC or the MPS.


Multiplier =
1
/
MPS OR
1
/
1
-
MPC





Putting it all together


Ex. Assume U.S. citizens spend 90¢ for every extra $1 of disposable
income they earn. Further assume that the real interest rate (r%)
decreases, causing a $50 billion increase in gross private investment.
Calculate the effect of a $50 billion increase in I
G

on U.S. Aggregate
Demand (AD).


Step 1: Calculate the MPC and MPS


MPC =
ΔC
/
ΔDI

=

.9
/
1

=
.9


MPS = 1


MPC =
.10


Step 2: Determine which Spending Multiplier to use.


Either 1/MPS OR 1/1
-
MPC


Step 3: Calculate the Spending Multiplier



1
/
MPS
=
1
/
.10

=
10

OR 1/1
-
MPC=1/1
-
.9=
10



Step 4: Calculate the Change in AD


(Δ C, I
G
, G, or X
N
) * Spending Multiplier


($50 billion Δ I
G
) * (10) =
$500 billion ΔAD



MPS, MPC, & Multipliers


Historically speaking, the Japanese are big savers. Let’s say
that for every extra dollar of disposable income they earn
they spend 25 cents. If they were each given a stimulus
check by how much would aggregate demand change
assuming the total stimulus was three billion dollars?


Step 1: Calculate the MPC and MPS


MPC =
ΔC
/
ΔDI

=

.20
/
1

=
.25


MPS = 1


MPC =
1
-
.25=.75


Step 2: Determine which multiplier to use.


Either 1/MPS OR 1/1
-
MPC


Step 3: Calculate the Spending Multiplier



1
/
MPS
=
1
/
.75

=
1.333

OR 1/1
-
MPC=1/1
-
.25=1.333


Step 4: Calculate the Change in AD


(Δ C, I
G
, G, or X
N
) * Spending Multiplier


($3 billion
Δ
DI)
*
(1.333)
=
$3.999 billion
ΔAD


Calculating the Spending Multiplier


1
/
MPS or 1/1
-
MPC


The
smaller

the fraction of any change in
income
saved
, the greater the
respending

at
each round and, therefore, the greater the
multiplier.


The larger the fraction of any change in
income spent, the greater the
respending

at
each round and, therefore the, the greater the
multiplier.

MPC & MPS

Review and Summary


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



MPC & MPS

Review and Summary


Multipliers (two to chose from)


1/1
-
MPC


1/MPS