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Tiffany Weir, Andrew B ernardo, Xijun Zhu

MPS/MPC, The Consumption Function, Consumption Schedule, The Expenditure Schedule and the Multiplier. Tiffany Weir, Andrew B ernardo, Xijun Zhu. MPC/MPS. MPC (Marginal Propensity to Consume) Definition: Ratio of the change in C to the change in DI that produces the change in C

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Tiffany Weir, Andrew B ernardo, Xijun Zhu

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  1. MPS/MPC, The Consumption Function, Consumption Schedule, The Expenditure Schedule and the Multiplier Tiffany Weir, Andrew Bernardo, Xijun Zhu

  2. MPC/MPS • MPC (Marginal Propensity to Consume) • Definition: • Ratio of the change in C to the change in DI that produces the change in C • MPC= change in C/change in DI • Tells us how much of every $1 in DI will go to C • Slope of CF • MPS (Marginal Propensity to Save) • Definition: • Fraction of each additional (marginal) dollar of DI not spent on C • MPS= 1-MPC • Tells us how much of every $1 in DI will go to Savings

  3. Consumption Function • Mathematical relationship indicating the rate of desired consumer spending at various levels of income • Illustrates induced (movement along) and autonomous (shifts) changes in C

  4. Movement along CF • From point A to B • Increase in C caused by an increase in DI • Induced increase in C • Income-Dependent Consumption • Slope of CF = MPC

  5. The Consumption Function, Consumption Schedule, Expenditure Schedule are equal when… • I, G, (X-IM) are constant, PL are constants , and C is the only variable component of AD • CF, Taxes are also fixed

  6. Oversimplified Multiplier Formula • Oversimplified Mult.= 1/1-MPC Slope’s effect on the Multiplier • When the MPC (Slope of the CF) is greater the Multiplier is greater

  7. Shifts of Expenditure Schedule • Y-axis is Total Expenditures • Shifts up or down because of the change in Spending • X-axis is RGDP • Different value illustrates the change in EGDP

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