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IMPORTANCE of the MULTILPIER

IMPORTANCE of the MULTILPIER. SIMPLIFIED. MULTIPLIER. Sequence of exchanges that would occur FOLLOW THE SEQUENCE OF EVENTS ROBIN HOOD DONATED $1,000 TO EACH STUDENT EACH STUDENT HAS AN MPC OF .8. How much would you spend, given an MPC of .8. $1,000 x .8 =$800. MULTIPLIER.

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IMPORTANCE of the MULTILPIER

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  1. IMPORTANCE of the MULTILPIER SIMPLIFIED

  2. MULTIPLIER • Sequence of exchanges that would occur • FOLLOW THE SEQUENCE OF EVENTS • ROBIN HOOD DONATED $1,000 TO EACH STUDENT • EACH STUDENT HAS AN MPC OF .8

  3. How much would you spend, given an MPC of .8

  4. $1,000 x .8 =$800

  5. MULTIPLIER $1,000 x .8 =$800

  6. MULTIPLIER $800 x .8 =$640

  7. MULTIPLIER $800 x .8 =$640

  8. MULTIPLIER $640 x .8 =$512

  9. MULTIPLIER $640 x .8 =$512

  10. MULTIPLIER $512 x .8 =$409.6

  11. MULTIPLIER $512 x .8 =$409.6

  12. MULTIPLIER $409.6 x .8 =$327.68

  13. MULTIPLIER $409.6 x .8 =$327.68

  14. MULTIPLIER $327.6 8x .8 =$262.14

  15. MULTIPLIER $327.6 8x .8 =$262.14 (3951.42)

  16. MULTIPLIER • SEQUENTIALLY THIS WILL GO ON UNTIL THE ADDITIONS TO INCOME AND THE ADDITIONS TO CONSUMPTION BOTH APPROACH ZERO • THE SUMS FOR INCOME AND CONSUMPTION APPREAR TO BE APPROACHING SPECIFIC NUMBERS • INCOME INCREASES GREATER THAN CONSUMPTION INCREASES

  17. MULTIPLIER • INCOME INCREASES GREATER THAN CONSUMPTION INCREASES BY AN AMOUNT EQUAL TO THE NEW INCOME ($1,000) INITIALLY INTRODUCED BY ROBIN HOOD TO EACH STUDENT • INCOME AND CONSUMPTION BOTH INCREASE BY A MULTIPLE OF THE ORIGINAL CHANGE IN INCOME

  18. MULTIPLIER • THE MPC IS IMPORTANT BECAUSE IT DETERMINES THE SIZE OF THE MULTIPLIER, WHICH DETERMINES HOW MUCH INCOME INCREASES. • RECREATE YOUR OWN MULTIPLIER USING AN MPC OF .9 AND THEN MPC 0F .5

  19. MULTIPLIER • SIMPLE MULTIPLIER WORKS SIMILARLY ON ANY CHANGE IN NEW SPENDING WHETHER INITIATED BY CONSUMERS, BUSINESSES OR GOVERNMENT. • THE CHANGE IN SPENDING, MUST BE AUTONOMOUS

  20. MULTIPLIER • AN ALGEBRAIC FORMULA HAS BEEN DEVELOPED THAT PERMITS MUCH QUICKER CALCULATION FOR THE AMOUNT BY WHICH TOTAL INCOME CHANGES WHEN SOMEONE INJECTS NEW SPENDING INTO THE ECONOMY. • THE FORMULA—CALLED THE MULTIPLIER • MULTIPLIER=1/(1-MPC)

  21. FORMULA • ALGEBRAICALLY THE MULTIPLIER YIELDS THE SAME CHANGE IN TOTAL INCOME: • MPC OF .8 • [1/(1-MPC)= • 1/(1-.8)= • 1/.2= • 10/2X$1,000= • $5,000

  22. FORMULA • ALGEBRAICALLY THE MULTIPLIER YIELDS THE SAME CHANGE IN TOTAL INCOME: • MPC OF .9 • [1/(1-MPC)= • 1/(1-.9)= • 1/.1= • 10/1X$1,000= • $10,000

  23. FORMULA • ALGEBRAICALLY THE MULTIPLIER YIELDS THE SAME CHANGE IN TOTAL INCOME: • MPC OF .5 • [1/(1-MPC)= • 1/(1-.5)= • 1/.5= • 2/1X$1,000= • $2,000

  24. CHANGE UP • REMEMBER THAT MPC+MPS=1 • THEREFORE, 1-MPC=MPS • WE CAN REPLACE EACH DENOMINATOR ABOVE WITH MPS • THIS ALLOWS US TO EXPRESS THE MULTIPLIER ALSO IN TERMS OF THE SAVINGS BEHAVIOR OF CONSUMERS • MULTIPLIER = 1/MPS

  25. FORMULA • FOR PRACTICE : • MPS OF .2, .1 AND .5

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