3.3 MPC, MPS, and Money Multiplier

What is the formula for MPC

MPC= ΔConsumption/ΔIncome

What is the formula for MPS

ΔSavings/ΔIncome

What is the relationship between MPC and MPS?

MPS+MPC=1

What is the formula for the money multiplier?

1/MPS

What is the relationship between MPC and a person’s wealth?

Wealthier people tend to save more money and therefore consumption decreases

Would an increase in saving behaviors among people increase, decrease, or have no effect on # of jobs?

An increase in saving behaviors would decrease the number of jobs.

Lower consumption makes businesses cut down on production

What is the money multiplier in words?

A number that measures how much real GDP can increase by. An initial change in spending leads to new sources of income for the first wave of people and then the next and so on.

When MPC gets smaller, what happens to the money multiplier and why?

As MPC decreases, money multiplier decrease because less money is flowing into the economy

Why does lowering taxes for the wealthy not lead to the creation of more jobs?

Wealthy people don’t spend that much of their money. Even when they do, they do so in financial investments, and not investments in physical capital, which actually creates jobs.