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Expenditure Multipliers CH 14- 2

Expenditure Multipliers CH 14- 2. The Multiplier. An autonomous change in aggregate spending leads to a chain reaction in which the change in real GDP is equal to the multiplier times the initial change in aggregate spending. The Multiplier. .

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Expenditure Multipliers CH 14- 2

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  1. Expenditure MultipliersCH 14- 2

  2. The Multiplier • An autonomous change in aggregate spending leads to a chain reaction in which the change in real GDP is equal to the multiplier times the initial change in aggregate spending.

  3. The Multiplier . The size of the multiplier, 1/(1 − MPC), depends on the marginal propensity to consume,: the larger the MPC, the larger the change in real GDP for any given autonomous increase in aggregate spending. ,. Marginal Propensity to Save MPS = 1-MPC , or

  4. THE EXPENDITURE MULTIPLIER When investment increases, aggregate expenditure and real GDP also increase. But the increase in real GDP is larger than the increase in investment. The multiplier is the amount by which a change in any component of autonomous expenditure is multiplied to determine the change that it generates in equilibrium expenditure and real GDP.

  5. THE EXPENDITURE MULTIPLIER • The Basic Idea of the Multiplier • The initial increase in investment brings an even bigger increase in aggregate expenditure because it induces an increase in consumption expenditure. • The multiplier determines the magnitude of the increase in aggregate expenditure that results from an increase in investment or another component of autonomous expenditure.

  6. THE EXPENDITURE MULTIPLIER 1. A $0.5 trillion increase in investment shifts the AE curve upward by $0.5 trillion from AE0 to AE1. 2.Equilibrium expenditure increases by $2 trillion from$9 trillion to $11 trillion. 3.The increase in equilibrium expenditure is 4 times the increase in investment, so the multiplier is 4

  7. Change in equilibrium expenditure Multiplier = Change in autonomous expenditure The Size of the Multiplier • The multiplier • The amount by which a change in autonomous expenditure is multiplied to determine the change in equilibrium expenditure that it generates. • Why Is the Multiplier Greater Than 1? • The multiplier is greater than 1 because an increase in autonomous expenditure induces an increase inaggregate expenditure in addition to the increase in autonomous expenditure.

  8. THE AD CURVE AND EQUILIBRIUM • The AE curve is the relationship between aggregate planned expenditure and real GDP when all other influences on expenditure plans remain the same. • The AD curve is the relationship between the quantity of real GDP demanded and the price level when all other influences on expenditure plans remain the same.

  9. when the price level changes, the AE curve shifts. • When the price level changes, other things remaining the same, aggregate planned expenditure changes and equilibrium expenditure changes. • Aggregate planned expenditure changes because a change in the price level changes the buying power of net assets, the real interest rate, and the real prices of exports and imports.

  10. THE AD CURVE AND EQUILIBRIUM When the price level rises to 130, the AE curve shifts downward to AE2. Equilibrium expenditure decreases to $9 trillion at point A. The quantity of real GDP demanded at the price level of 130 is $9 trillion—a movement along the AD curve to point A.

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