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Published byAubrey Porter Modified over 7 years ago

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Aggregate Expenditures: The multiplier Chapter 10 Part 2 of Unit 5

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Read Page 199 Squaring the Economic Circle

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The Multiplier Effect Small change in investment leads to a large change in output and income. The multiplier determines how large the change will be Multiplier = change in GDPr / initial change in spending Ex. A $5 billion change in Ig led to a $20 billion change in GDP. What is the multiplier? 4444

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Rationale The economy has continuous flows of expenditure & income—ripple effect Income received by person A comes from $ spent from person B. Change in income will cause both C and S to vary in the same direction as the initial change in income (increase or decease) and by a fraction of that change.

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Rationale continued The fraction of the change in income that is spent is called the MPC The fraction of the change in income that is saved is called the MPS

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Multiplier & Marginal Propensities The size of the MPC and the multiplier are directly related The size of the MPS & the multiplier are inversely related M = 1 / MPS or M = 1 / (1-MPC)

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Significance of the Multiplier A small change in investment plans or consumption savings plans can trigger a much larger change in the equilibrium level of GDP

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Generalizing the Multiplier We have seen the simple multiplier The multiplier can be generalized to include other “leakages” from the spending flow besides savings Realistic multiplier includes taxes and imports

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