President Obama announces a second stimulus package that will inject 50B in additional funds for the Stimulus and Recovery Act Consumption amp Savings MPC MPS amp Multiplier Analysis ID: 1028012
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1. If I gave you $500 …how much would you spend and how much would you save?
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4. “ President Obama announces a second stimulus package that will inject$50B in additional funds for the Stimulus and Recovery Act.”
5. Consumption & SavingsMPC, MPS & Multiplier Analysis:Is a $600.00 stimulus check reallyA $600.00 stimulus check?
6. ConsumptionConsumption is a function of disposable income (DI)DIC
7. MPC = Change in consumer spending Change in disposable income Total effect: Dependent on MPCMarginal Propensity to Consume If your income rises how much will you spend? How much will you save?
8. Marginal Propensity to ConsumeMPC=Change in ConsumptionChange in Disposable IncomeMPC + MPS = 1Marginal….if you get one more dollar how much of that extra dollar will you spend?
9. Marginal Propensity to SAVEMPS=Change in SAVINGSChange in Disposable IncomeMPC + MPS = 1Marginal….if you get one more dollar how much of that extra dollar will you spend?
10. What does this mean?MPC + MPS = 1I give you a $100 (change in income) You save $50 and spend $50MPC= .50 MPS= .50.50 + .50 = 1Marginal….if you get one more dollar how much of that extra dollar will you spend?
11. MULTIPLIER:Magnitude of shift of curve– all things remaining constant$50 Billion “I” from firmsIncrease in DI to households – wages riseIncrease in “C”Increase in output by firmsIncrease in output– wages riseIncrease in “C”& so on and so onWhat is total effect of $50B?
12. Chain ReactionChange in REAL GDP is a multiple of the size of the initial change in spending: Total Increase in RGDP= $50B x 1 1-MPCIf MPC is high (approaching 1) then multiplier is high…..Multiplier =
13. MultiplierGovernment Spending, Consumption and Investment Multiplier=11-MPCMPC=.75 -- Multiplier = 1 1- .75= 4“ Congress announces a major increase in spending worth $100B to increase AD”
14. Power of the Spending/Consumption Multiplier“ President Obama announces a second stimulus package that will inject$50B in additional funds for the Stimulus and Recovery Act.”If MPC is .90 then how much growth will the $50B in governmentspending create?
15. Power of the Tax Multiplier“ President Obama announces a second stimulus package that will cut taxesFor individuals by a total of $20 billion. Expectation is that this tax cut will create large amounts of economic growth”If MPC is .80 then how much growth will the $20B in tax cuts create?
16. Multipliers by NameTax Multiplier- Measures impact of a tax cut Same formula as above but subtract 1 from your answer Consumption and Investment Multiplier- Measures impact of spending by business and individualsGovernment Spending Multiplier- Measures impact of spending by govt.BOTH OF THIS ARE CALCULATED THE SAME WAY: Multiplier = 1 1- MPC
17. The United States is currently experiencing a recession and the government increases spending by $50Billion. If the MPC is .75: What is the multiplier? What will the overall result on overall spending from the Govts increase?
18. Consumption FunctionAutonomous Consumption – there is a minimum amount of consumption per person…even if income is 0?C = 40 + .80 (DI) Disposable IncomeConsumption [C]Savings [S]040-40100120-2020020003002802040036040Autonomous ConsumptionMarginal Propensity ConsumeDI $100=> C $80
19. MPS = 1 (-) MPCWhat about “saving” some money?
20. SavingsSavings = DI – Consumption ( S = DI – C )MPS = ∆S / ∆ DIMPC + MPS = 1Must be true because everything not saved is consumed:DI = C + Sfraction of income savedfraction of income consumed
21. Savings FunctionAutonomous Savings----Savings can be negative since consumption is never zeroS = -40 + .20 (DI) Disposable IncomeConsumption [C]Savings [S]040-40100120-2020020003002802040036040Autonomous SavingsMarginal Propensity SaveDI $100=> S $20
22. Marginal Propensity to ConsumeSlope of the consumption function is the marginal propensity to consume (MPC) MPC = ∆C / ∆ DI
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24. MultiplierSpending & investment have a “multiple” affect on GDPPRODUCT Market FACTOR Market FIRMSHOUSEHOLDSGovernment raises spending $100If MPC = .80Round 1 $100.0Round 2 $80.0Round 3 $64.0Round 4 $51.2Etc….. Change in GDP: