Disposable Income (DI)

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 and services)
-save (not spend money on goods and services)

Consumption:
-household spending
-ability to consumer is constrained by

• the amount of disposable income
• the propensity to save

-do households consumer if DI=0?

-autonomous consumption

-did saving

-APC = C/DI = % DI that is spent 

Savings
Household NOT spending
The ability to save is constrained by 

• the amount of disposable income
• the propensity to consume

-do households consumer if DI=0? No

-APS = S/DI = DI that is not spent 

Formulas

• APC + APS = 1
• 1 - APC + APS
• 1 - APS + APC
• APC > 1 .: dissaving 

MPC: Marginal propensity to consume

-🔼C/🔼DI
-% of every extra dollar earned that is spent

Marginal propensity to save
-🔼S/🔼DI
-% 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 (c, ig, g, Xn) causes a larger change in aggregate spending or aggregate demand (AD)
-multiplier = change in AD/change in spending
-multiplier = 🔼AD/🔼 c, I, g, or x

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

Calculating the Spending multiplier
-formula: multiplier = 1/1- MPC or 1/MPS
-multipliers are + when there is an increase in spending and -when there is a decrease

Calculating the tax multiplier
When the government taxes the multiplier works in reverse why?
-because now money is leaving the circular glow

Tax multiplier (not it's negative)
=-MPC/1-MPC or -MPC/MPS
- if there is a tax cut then the multiplier is +, because there is now more money in the circular flow