UNIT 3: Aggregate Demand & Supply 2/25/16

Disposable Income is income that is left over after Taxes and Bills, Net income
Gross Income - Taxes = DI

There are only two options when deciding how to use DI: Consuming it or spending it.
if DI increases, both savings and consumptions increase
If DI = 0 then auto consumption has left no income for savings, or it has even dipped into dis-savings

Average Propensity to Consume is the average willingness to spend money
Average Propensity to Save is the average willingness to save money

Average Propensity to Consume + Average Propensity to Save ALWAYS = 1 since DI = 1
if APC > 1, or you have a negative APS = dis-savings
1 - APC = APS
1 - APS = APC

Marginal Propensity to Consume is the fractions of change that occurs to consumption when DI changes.

Marginal Propensity to Save is the fractions of change that occurs to Savings when DI changes.

Change in Consumption        =    MPC
Change in DI

Change in Savings        =    MPS
Change in DI

Like APC and APS, MPS + MPC = 1

Spending Mulitpliers

The formula to find Government Spending Multiplier is 1/MPS or 1/(1-MPC)

The formula to find Tax Multiplier is negative MPC/MPS

The Paradox of Thrift claims that people save in a recession, which worsens the condition of the recession.

If consumption is 1:1 with DI, there is a upwards sloping 45 degree function where C = DI and there is no Savings

2/29/16

Deficit budget means that we spend more than we take in   Revenue<Expenditures
Surplus Budget means that we earn more than we spend     Revenue>Expenditures
Balanced Budget means that we break even                         Revenue=Expenditures

If a government is in a deficit, it primarily borrows money to pay it back
It can borrow money from citizens and corporations in the form of taxes and bonds, or it can borrow money from foreign governments.

Fiscal Policies include 2 things; Discretionary(action must be taken) and Non Discretionary(no action needed) policies

The government has two options to discretionary actions it can control to help regulate the economy: Change Taxes or Change Government Spending

Easy money is used to combat recessions and involves lessening taxes and increasing government spending

Tight money is used to combat inflation and involves raising taxes and increasing government spending

Non discretionary policies would include Automatic Stabilizers; Such as Social Security, Welfare, government transfer payments, Medicare and Medicaid