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10 - 1 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show Aggregate Expenditures The Multiplier, Net Exports, and Government 10 C H A P T E R

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10 - 2 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show CHANGES IN EQUILIBRIUM GDP AND THE MULTIPLIER Private spending (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) 510 490 470 450 430 430 450 470 490 510 (C + I g ) 0 (C + I g ) 1 Equilibrium GDP at I g0 level of investment Equilibrium GDP at I g1 level of investment Increases in the level of C + I g

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10 - 3 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show CHANGES IN EQUILIBRIUM GDP AND THE MULTIPLIER Private spending (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) 510 490 470 450 430 430 450 470 490 510 Equilibrium GDP at I g2 level of investment (C + I g ) 0 (C + I g ) 2 Decreases in the level of C + I g

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10 - 4 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show Change in GDP = Multiplier x initial change in spending THE MULTIPLIER EFFECT Multiplier = Change in Real GDP Initial Change in Spending Inverse relationship between Multiplier & MPS The Multiplier Effect and the Marginal Propensities

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10 - 5 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show Change in GDP = Multiplier x initial change in spending Multiplier = or 1 MPS 1 1 - MPC THE MULTIPLIER EFFECT.9.8.75.67.5 10 5 4 3 2 MPCMultiplier MPC and the Multiplier

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10 - 6 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT Net Exports Positive if exports > imports Negative if imports > exports Net Exports and Aggregate Expenditures C + I g + ( X – M ) X n = ( X – M ) C + I g + X n

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10 - 7 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT Net Export Schedule Net Exports and Equilibrium GDP Positive Net Exports Negative Net Exports Graphically…

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10 - 8 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT Private spending (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) 510 490 470 450 430 430 450 470 490 510 Aggregate Expenditures with Positive Net Exports C + I g C + I g + X n1 Net Exports, X n (billions of dollars) +5 0 -5 430 450 470 490 510 Real GDP

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10 - 9 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show INTERNATIONAL TRADE AND EQUILIBRIUM OUTPUT Private spending (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) 510 490 470 450 430 430 450 470 490 510 Aggregate Expenditures with Negative Net Exports C + I g C + I g + X n2 Net Exports, X n (billions of dollars) +5 0 -5 430 450 470 490 510 Real GDP

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10 - 10 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show INTERNATIONAL ECONOMIC LINKAGES Prosperity Abroad Tariffs Exchange Rates

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10 - 11 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show GLOBAL PERSPECTIVE NET EXPORTS OF GOODS, 1999 Source: World Trade Organization -400-140-100-60-2002060100 Negative Net ExportsPositive Net Exports Billions of Dollars United States United Kingdom Canada France Germany Italy Japan

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10 - 12 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show ADDING THE PUBLIC SECTOR Simplifying Assumptions Investment and Net Exports are Independent of the Level of GDP Government Purchases Do Not Affect Private Spending All Taxes are Personal Tax Collections are Fixed Unless Stated Otherwise, Price Level is Constant

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10 - 13 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show ADDING THE PUBLIC SECTOR Aggregate Expenditures (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) 470 550 C C + I g + X n C + I g + X n + G Government Spending of $20 Billion Government Purchases and Equilibrium GDP

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10 - 14 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show ADDING THE PUBLIC SECTOR Lump-Sum Tax and Equilibrium GDP Aggregate Expenditures (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) 490 550 C + I g + X n + G C a + I g + X n + G $15 Billion Decrease in Consumption from a $20 Billion Increase in Taxes

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10 - 15 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show ADDING THE PUBLIC SECTOR Injections Leakages Unplanned Changes in Inventories Balanced Budget Multiplier Recessionary Gap Inflationary Gap

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10 - 16 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show FULL-EMPLOYMENT GDP Aggregate Expenditures (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) 490 510 530 AE 0 Recessionary Gap AE 1 530 510 490 Recessionary Gap = $5 Billion Full Employment

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10 - 17 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show FULL-EMPLOYMENT GDP Aggregate Expenditures (billions of dollars) o 45 o Real domestic product, GDP (billions of dollars) 490 510 530 AE 0 Inflationary Gap AE 2 530 510 490 Inflationary Gap = $5 Billion Full Employment

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10 - 18 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show APPLICATIONS OF THE MODEL Great Depression Vietnam War Inflation The End of the Japanese Growth “Miracle”

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10 - 19 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show LIMITATIONS OF THE MODEL Does Not Show Price- Level Changes Ignores Premature Demand-Pull Inflation Bars Real GDP Beyond Full-Employment Does Not Deal With Cost-Push Inflation

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10 - 20 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show

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multiplier net exports lump-sum tax balanced-budget multiplier recessionary gap inflationary gap Copyright McGraw-Hill/Irwin, 2002 ENDBACK

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10 - 22 Copyright McGraw-Hill/Irwin, 2002 Changes in Equilibrium GDP and the Multiplier The Multiplier Effect International Trade and Equilibrium Output International Economic Linkages Adding the Public Sector Full-Employment GDP Applications of the Model Limitations of the Model Key Terms Previous Slide Next Slide End Show Coming Next: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 11

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