APS=C/DI. MPC=C/DI. MPS=S/DI. MPC+MPS=1. C=C0+MPC (DI). S=-C0+MPS (DI). Mi=GDP/i or Mi=1/(1-MPC)=1/MPC

APS=C/DI

· the fraction of any total income which is saved is the average propensity to save

The fraction of DI which is consumed declines as DI, rises, and the fraction of DI which is saved rises as DI increases.

Marginal Propensities.

The proportain of any change in income cosumed is called the

marginal propensity to consume.

MPC=C/DI

The proportain of any change in income cosumed is called the marginal propensity to save.

MPS=S/DI

The sum of MPC and MPS for any change in DI must always be 1.

MPC+MPS=1

C=C0+MPC (DI)

S=-C0+MPS (DI)

Nonincome determinants of Cand's.

· Wealth (realand financial asserts) - the greater the wealth households have accumulated, the large amount

· Expectations about future prices, income, goods availability.

· Household debt

· Taxation

The multiplier effect.

The change in investment leads to a larger change in output and income.

The results is called-the multiplier effect.

The ratio of a change in equilibrium GDP to the inital change in investment spending.

Mi=GDP/i or Mi=1/(1-MPC)=1/MPC