ap macro: marginal perpensity to consume

February 14, 2012 Klein: Short Quiz1. What does the velocity of money

measure?2. Under which of the following conditions would

consumer spending most likely increase?A Consumers have large unpaid balances on their credit cards

B The government encourages consumers to increase their savingsC Consumers’ wealth is increased by changes in the stock market

D Social security taxes are increasedE Consumers believe they will not receive pay increase next year

3. What is the largest part GDP formula?

Think about…. People who spend a lot

People who don’t

Earnings to spending ratio

What are you?

Spending

Y = C + I + G + Nx

Spending Average propensity to consume C = spending Y = gross income T = taxation

Average propensity to save

APS = S/(Y-T)

Mr. Klein made $39,710 in 2012

Spent around $22,000

APC? APS?

If I get a raise next year? (or if investments increase)

In theory: APC + APS = 1

1 represents a person’s net income

Might not be 1 in reality though

Velocity of money?

higher

APC and APS practice 1. Engineering, year 1

• Spends $20,000 2. Engineering, year 10

• Spends $40,000 3. Health, year 1

• Spends $30,000 4. Health, year 10

• Spends $35,000 5. Business, year 1

• Spends $15,000

Spending Economists think “at the margin”

Marginal propensity to consume

Sometimes called the “consumption function”

Klein spent $1000 more in 2012 Klein earned $2000 more in 2012 So his MPC = .5

Spending Economists think “at the margin”

Marginal propensity to save

MPS + MPC = 1, again…..

Bernanke on spending

On back of article:

1. What is his point?2. What does it have to do with MPC?3. Explain: Do you agree with his analysis?4. Why would restaurant owners care about MPC?5. Why might learning about MPC/MPS help your

in your personal life?