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The document defines the multiplier as measuring the response of output to a change in exogenous expenditure. It provides definitions for consumption, investment, government purchases, and net exports. It derives the consumption function and defines the marginal propensity to consume and marginal propensity to save, showing their relationship to income. It indicates multipliers can be derived for government spending, investment, net exports, taxes, and a balanced budget scenario.
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Chapter11 Add
- 1. The Multiplier Definition: the multiplier measures the response of output to a change in exogenous expenditure components. Exogenous Expenditure Components: those parts of private sector expenditures that are determined outside the economic model.
- 2. Deriving the Multiplier Y = C + I + G + X Definitions: C = Consumption Expenditures I = Investment Expenditures G = Government Purchases X = Net Exports
- 3. Consumption C = a + b(Y – T), a > 0, 0 < b < 1 C Y a-bT
- 4. Marginal Propensity to Consume: measures the change in C associated with a change in income Y. MPC = C/ Y = b 0 < MPC < 1
- 5. Marginal propensity to Save: Measures the change in saving associated with a change in income Y. S = Y – C = Y – a – b(Y – T) S = -a + (1 – b)Y + bT MPS = S/ Y = 1 – b 0 < MPS < 1
- 6. Exogenous Spending Components: Solve for Y:
- 8. Investment Spending Multiplier: Net Exports Multiplier:
- 9. Tax Multiplier: Balanced-Budget Multiplier:
- 10. Implication: if government purchases rise by a dollar, so does income.
- 11. Numerical Example Problem: compute the equilibrium level of income, Y. Numerical Values:
- 12. Value of the Multiplier: 1/(1-b)=1/(1-.75) = 4