... that is spent for survival - it is assumed that even when no income is being produced, households will still need to spend their money on necessities to survive, for which they will break into savings. The consumption function is C=A+bY, which is the marginal propensity to consume. This is drawn in figure one[1]. Because C+I equals Y, a 45° degree line is drawn in, showing all the points where this is true. Equilibrium occurs at the point where the MPC line crosses the 45° line. The formula for the multiplier is 1/(1-MPC). This can be simplified to 1/MPS, where MPS is the marginal propensity to save. In our earlier example, MPC=A=0.7 , which meant that 70% of income was consumed. Therefore, MPS must be 1-MPC=0.3. Thus, when MPC=0.7, the multiplier is: 1/MPS=1/0.3=3.3 This means that for every unit increase in I, Y will rise by 3.3 units. Every unit of income gives rise to ...

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