# MPC, MPS, and Multipliers

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28 Οκτ 2013 (πριν από 4 χρόνια και 8 μήνες)

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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

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

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

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) =

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

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