Tiffany Weir, Andrew B ernardo, Xijun Zhu

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# Tiffany Weir, Andrew B ernardo, Xijun Zhu - PowerPoint PPT Presentation

MPS/MPC, The Consumption Function, Consumption Schedule, The Expenditure Schedule and the Multiplier. Tiffany Weir, Andrew B ernardo, Xijun Zhu. MPC/MPS. MPC (Marginal Propensity to Consume) Definition: Ratio of the change in C to the change in DI that produces the change in C

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### MPS/MPC, The Consumption Function, Consumption Schedule, The Expenditure Schedule and the Multiplier

Tiffany Weir, Andrew Bernardo, Xijun Zhu

MPC/MPS
• MPC (Marginal Propensity to Consume)
• Definition:
• Ratio of the change in C to the change in DI that produces the change in C
• MPC= change in C/change in DI
• Tells us how much of every \$1 in DI will go to C
• Slope of CF
• MPS (Marginal Propensity to Save)
• Definition:
• Fraction of each additional (marginal) dollar of DI not spent on C
• MPS= 1-MPC
• Tells us how much of every \$1 in DI will go to Savings
Consumption Function
• Mathematical relationship indicating the rate of desired consumer spending at various levels of income
• Illustrates induced (movement along) and autonomous (shifts) changes in C
Movement along CF
• From point A to B
• Increase in C caused by an increase in DI
• Induced increase in C
• Income-Dependent Consumption
• Slope of CF = MPC
The Consumption Function, Consumption Schedule, Expenditure Schedule are equal when…
• I, G, (X-IM) are constant, PL are constants , and C is the only variable component of AD
• CF, Taxes are also fixed
Oversimplified Multiplier Formula
• Oversimplified Mult.= 1/1-MPC

Slope’s effect on the Multiplier

• When the MPC (Slope of the CF) is greater the Multiplier is greater
Shifts of Expenditure Schedule
• Y-axis is Total Expenditures
• Shifts up or down because of the change in Spending
• X-axis is RGDP
• Different value illustrates the change in EGDP