M.P.C. & M.P.S.

MPC + MPS = 1

• The MPC and MPS are percentages of spending and savings.
• $100 income. Spend $60 and save $40 . MPC is .6 (60%), MPS is .4 (40%)

WHY?!

The MPC and MPS is very important to fiscal policy.
Government economists use MPC and especially the MPS to fit inflationary and recessionary gaps.

How do they do this?
The spending and tax multiplier is how.
Spending multiplier
= 1/MPS or 1/(1-MPC)
Tax multiplier
= (MPC)/(MPS)

THE SPENDING MULTIPLIER

• Used to calculate how an initial change in spending will be magnified in the economy
• Prevents government from spending too much (inflation) or not enough (recession)

SPENDING MULTIPLIER (1/MPS)

• MPC = .75
• 1/(1-MPC) [the mps] = 1/.25 (100/25) = 4
• Spending multiplier is 4
• Multiply this to initial change in spending

PRACTICE!!

• MPC is .25
• How much is an initial spending of $100 multipied?? Use calculator!

$133.33!!!!

TAX MULTIPLIER

• Very similar to the spending multiplier
• Tax policy is trickier
• Changes in tax policy does not have the same effect as changes in gov't spending
• Still has the same effect in the end

THE TAX MULTIPLIER (MPC/MPS)

• MPC = .75
• MPC/MPS= .75/.25
• Tax multiplier = 3
• Multiply this to initial change in taxes

PRACTICE!!

• MPC is .25
• How much is a tax break of $100 magnified?

$33.33