Marginal propensity to consume.
In plain English
The marginal propensity to consume, or MPC, measures the change in spending divided by the change in income that caused it. It tends to be higher for lower-income households, which have more unmet needs and less cushion, and lower for higher-income households that save more of a raise. Whatever is not consumed is the marginal propensity to save, so the two add to 1. The fiscal multiplier is built directly on this number. Which households receive a payment therefore changes how much economic activity it generates.
01Why it matters
Whether a rebate or a tax cut boosts the economy depends on who receives it, because a dollar sent to a household that spends most of it does far more than a dollar sent to one that saves it.
02The math, step by step
A household's after-tax income rises by $2,000 and its spending rises by $1,700. MPC is 1,700 divided by 2,000, or 0.85. The marginal propensity to save is 1 minus 0.85, which is 0.15.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
The savings rate describes the share of total income saved. MPC describes what happens to the next dollar only. A household saving 10 percent of its income overall might still spend 90 cents of a surprise bonus, or none of it, depending on circumstances.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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