1. How does Money affect Aggregate Demand? The Consumption Function, Investment Demand, and The Multiplier
2. What would each of the following to do with an extra $1000? 1. A single female working for a high-paying IT company in India. 2. A middle-class couple whose computer is broken, but who has hopes of sending their children to college. 3. A male from a lower-class family who wants to pursue an advanced degree in engineering.
3. How Can you Spend Your Money? Disposable Income (DI)= Salary – taxes Can be spent on Consumption or Savings
6. If at 45°, C = DI … Dissavings: C> DI A, B, C Savings: C < DI E, F
7. MPC and MPS MARGINAL PROPENSITY TO CONSUME MARGINAL PROPENSITY TO SAVE If you receive extra income MPC is the % of the money you use on consumption MPC= ΔC / ΔDI MPS is the % of the money you put in savings MPS = ΔS / ΔDI MPC + MPS = 1
8. EXAMPLE A citizen from India, just got her Bachelors, and therefore will receive $1000 more this month. If her MPS is .2, how much money is put into Savings? What is her MPC, and how much money is spent?
9. EXAMPLE A citizen from India, just got her Bachelors, and therefore will receive $1000 more this month. If her MPS is .2: Savings: $200 (1000 X .2) MPC= 1 - .2 = .8 Consumption: $800
10. Determinants of C and S… 1) Expectations about Prices and Income 2) Interest Rates 3) Taxes 4) Wealth
11. EXPENDITURE PLANS An upward shift = more Consumption A downward shift = less consumption
12. How Does The Money Keep Rollin’ In? The Types of Multipliers: The Spending Multiplier = (1/MPS) The Investment Multiplier = (1/MPS) The Tax Multiplier = MPC X (1/MPS) *THE BIGGER MPC, THE BIGGER THE MULTIPLIER!
13. How much SCRILLA ROLLS in if… The Government of Argentina Spends $1,000 MPC: .75 Investment Increases by $1,000 MPC: .75 The Government Decreases Taxes by $1,000 MPC: .75
14. How much SCRILLA ROLLS in if… The Government of Argentina Spends $1,000 $1,000 X (1/.25) = $4,000 Investment Increases by $1,000 $1,000 X (1/.25) = $4,000 The Government Decreases Taxes by $1,000 $1,000 X .75 X 4 = $3,000