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Marginal Propensity to Save or Consume

Marginal Propensity to Save or Consume. AP Macroeconomics. Review from yesterday: Why more produced than is demanded?. Firms experience a build-up of inventories: More product is unsold and sitting in the warehouse Firms respond by producing less and laying off workers

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Marginal Propensity to Save or Consume

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  1. Marginal Propensity to Save or Consume AP Macroeconomics

  2. Review from yesterday: Why more produced than is demanded? • Firms experience a build-up of inventories: More product is unsold and sitting in the warehouse • Firms respond by producing less and laying off workers • Output decreases and moves the economy toward the equilibrium level of output Y

  3. Consumption • Consumption can be represented by the equation C = a + bY, where Y is income or output • b is the marginal propensity to consume (MPC), which shows the amount by which consumption will increase if income increases by $1 • MPC = change in consumption/change in income http://www.reffonomics.com/textbook2/macroeconomics2/keynesianthought/keynesianformulas.swf

  4. Remember… • In the simplest of simple models, households have only 2 things that they can do with their income

  5. Money in the bank, money money in the bank…

  6. Saving & Dissaving We are technically in a state of “dissaving” when output and expenditure are below the equilibrium, and consumption exceeds income/output. Why could this phenomenon occur? When we don’t have income (and perhaps are unemployed) and are living off of our savings! http://yadayadayadaecon.com/concept/saving/ Unit 3: Macroeconomics Visual 3.3

  7. Therefore… • If households have the choice to consume or save, the marginal propensity to consume plus the marginal propensity to save must equal 1. MPC + MPS = 1

  8. Tomorrow… THE MULTIPLIER…

  9. And now… • Some resources: http://www.reffonomics.com/textbook2/macroeconomics2/keynesianthought/keynesiancross.swf

  10. Works Cited • Economics of Seinfeld. Saving.http://yadayadayadaecon.com/concept/saving/ • Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers. • Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print. • Reffonomics. www.reffonomics.com.

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