
The increase in consumer spending when
disposable income rises by $1.
◦ Disposable income is the money one has after
paying taxes (the money one has to live on).

The increase in household savings when
disposable income rises by $1


An initial rise or fall in aggregate spending
that is the cause, not the result, of a series of
income and spending changes.
(autonomous means “self-governing”)

The multiplier shows how initial changes in
spending lead to further changes.
◦ The ratio of the total change in real GDP caused by
an autonomous change in Aggregate Spending to
the size of that autonomous change


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The federal government recently enacted the
American Recovery and Reinvestment Act of
2009.
This “stimulus package” of $787 billion was
intended to spark job growth to reverse the
worst recession since the Great Depression.
How was this supposed to work?

The short answer is that $1 of spending in
one area of the economy multiplies into more
than $1 of spending throughout the
economy.


Consumption is a huge fraction (more than
2/3) of total spending in the economy.
After a person pays his taxes, he is left with
disposable income (Yd) that can either be
consumed or saved.
◦ Yd = C + S

When a person gets more disposable income,
Yd, he will increase both C and S.
The marginal propensity to consume (MPC) =

The marginal propensity to save MPS =

change in consumption/change in disposable
income.
Change in Saving/Change in Disposable Income
◦ MPC + MPS = 1

The Consumption Function is an equation
showing how an individual household’s
consumer spending varies with the
household’s current disposable income.