Download Marginal Propensity to Consume

Marginal Propensity to Consume
●  Measures the ratio of the change in consumption to the
change in disposable income that produces the change in
consumption
●  Expressed as a number from 0 to 1
o  1: For every additional dollar a person receives, they spend
all of it
o  0: For every additional dollar a person receives, they spend
none of it
o  .5: For every additional dollar a person receives, they spend
50 cents of it
Slide 1
Marginal Propensity to Save
●  Measures the the ratio of the change in saving to the
change in disposable income that produces the change in
saving
●  Expressed as a number from 0 to 1
o  0: For every additional dollar a person receives, they save
none of it
o  1: For every additional dollar a person receives, they save all
of it
o  .8: For every additional dollar a person receives, they save 80
cents of it
Slide 2
Relationship Between MPC and
MPS
●  When a person receives a dollar, they can either spend it or
save it
●  Thus, the marginal propensity to consume and marginal
propensity to save will equal 1 when added together
o  If the marginal propensity to consume is .8, 80 cents out of
every additional dollar is spent
o  This leaves 20 cents to be saved
●  1 - MPC = MPS
Slide 3
Multiplier Effect
Economic
Agent Spends
Money
Business
Spends Money
Money
flows to
business
Individual
Spends Money
Individual
Spends Money
Money
flows to
individual
Business
Spends Money
Money
flows to
individual
Money
flows to
business
Business
Spends Money
Money
flows to
business
Slide 4
Spending Multiplier
●  Spending multiplier
o  Used when an economic agent spends money in the economy
o  1/1-MPC or 1/MPS
§ 
Example: Individual spends $500. MPC of .75.
How much economic growth will the spending
create?
● 
● 
1/1-.75 = 4
4 X $500 = $2,000 of additional economic growth
Slide 5