7. How can money affect AD?

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Consumption Function, MPS, MPC, Multipliers

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7. How can money affect AD?

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

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