Consumption and Saving

Disposable Income (DI) -

- Income after taxes or net income

- DI  =gross income - taxes

2 Choices (With Disposable Income)

- With DI, households can either Consume or Save

Consumption

- Household spending

- Ability to consume is constrained by the amount of available DI or the propensity to save

Saving

- Household not spending

- The ability to save can be constrained by the amount of available DI and the propensity to consume

-Households do not save if DI = 0

Determinants of Consumption and Saving

1. Wealth

2. Household Debt

3. Taxes

4. Expectations