Unit 3: Multipliers

Image result for economic multiplier graph

 The Spending Multiplier Effect 

  • an initial change in spending (C, IG, G, XN) causes a larger change in aggregate spending, or Aggregate Demand (AD). 
  • multiplier = change in AD/change in spending
  • change in AD/change in C, IG, G, or XN)
  • why this happens: expenditures and income flow continuously which sets off a sending increase in the economy
  • the spending multiplier can be calculated from the MPC or the MPS 
  • multiplier = 1/1-MPC or 1/MPS
  • multipliers are positive when there is an increase in spending and negative when there is a decrease

The Tax Multiplier 

  • when the government taxes, the multiplier works in reverse because now money is leaving the circular flow
  • the tax multiplier is always negative 
  • -MPC/1-MPC or MPC/MPS
  • if there is a tax cut, then the multiplier is positive because there is now more money in the circular flow

Comments

  1. UnknownApril 6, 2018 at 12:22 AM

    Remember that you can also find real GDP by using the spending or tax multiplier (depending on what is given) and multiplying that by the previous real GDP.

    ReplyDelete

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