EXPENDITUREMULTIPLIERSTHEKEYNESIANMODEL.pptVIP

* * * * THE MULTIPLIER The multiplier is the amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP. THE MULTIPLIER The Basic Idea of the Multiplier An increase in investment (or any other component of autonomous expenditure) increases aggregate expenditure and real GDP. The increase in real GDP leads to an increase in induced expenditure. The increase in induced expenditure leads to a further increase in aggregate expenditure and real GDP. So real GDP increases by more than the initial increase in autonomous expenditure. THE MULTIPLIER An increase in autonomous expenditure brings an unplanned decrease in inventories. So firms increase production and real GDP increases to a new equilibrium. THE MULTIPLIER Why Is the Multiplier Greater than 1? The multiplier is greater than 1 because an increase in autonomous expenditure induces further increases in aggregate expenditure. The Size of the Multiplier The size of the multiplier is the change in equilibrium expenditure divided by the change in autonomous expenditure. THE MULTIPLIER The Multiplier and the Slope of the AE Curve The slope of the AE curve determines the magnitude of the multiplier: Multiplier = 1 ÷ (1 – Slope of AE curve) THE MULTIPLIER When there are no income taxes and no imports, the slope of the AE curve equals the marginal propensity to consume, so the multiplier is Multiplier = 1 ÷ (1 - MPC). But 1 – MPC = MPS, so the multiplier is also Multiplier = 1 ÷ MPS. * * * * * * * Marginal and average propensities. The text defines the MPC and MPS, and shows that they sum to one because disposable income can only be consumed or saved. The textbook does not define and explain the APC and APS. These concepts have no operational significance and not worth bringing to the student’s attention. * * * * * * * The main difference between the Keynesian cross model of the 1940s and the aggregate expenditure model of today is that f