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Tuesday Feb. 14, 2012
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February 14, 2012 Klein: Short Quiz1. What does the velocity of money
measure?2. Under which of the following conditions would
consumer spending most likely increase?A Consumers have large unpaid balances on their credit cards
B The government encourages consumers to increase their savingsC Consumers’ wealth is increased by changes in the stock market
D Social security taxes are increasedE Consumers believe they will not receive pay increase next year
3. What is the largest part GDP formula?
Think about…. People who spend a lot
People who don’t
Earnings to spending ratio
What are you?
Spending
Y = C + I + G + Nx
Spending Average propensity to consume C = spending Y = gross income T = taxation
Average propensity to save
APS = S/(Y-T)
Mr. Klein made $39,710 in 2012
Spent around $22,000
APC? APS?
If I get a raise next year? (or if investments increase)
In theory: APC + APS = 1
1 represents a person’s net income
Might not be 1 in reality though
Velocity of money?
higher
APC and APS practice 1. Engineering, year 1
• Spends $20,000 2. Engineering, year 10
• Spends $40,000 3. Health, year 1
• Spends $30,000 4. Health, year 10
• Spends $35,000 5. Business, year 1
• Spends $15,000
Spending Economists think “at the margin”
Marginal propensity to consume
Sometimes called the “consumption function”
Klein spent $1000 more in 2012 Klein earned $2000 more in 2012 So his MPC = .5
Spending Economists think “at the margin”
Marginal propensity to save
MPS + MPC = 1, again…..
Bernanke on spending
On back of article:
1. What is his point?2. What does it have to do with MPC?3. Explain: Do you agree with his analysis?4. Why would restaurant owners care about MPC?5. Why might learning about MPC/MPS help your
in your personal life?