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December-09-08
8:19 AM
- Multiplier effect - the magnified impact of a change on aggregate demand; price level stays constant,
change in spending at one price value.
- Marginal Propensity to Consume - the effect on domestic consumption of a change in income
- Marginal Propensity to Withdraw - the effect on withdrawals 0 savings, imports, and taxes - of a change
in income
1 = MPC + MPW
MULTIPLIER EFFECT
- Is the magnified impact of any spending change on aggregate demand. It assumes that the price levels
stays the same.
- The multiplier effect is the change in spending at one price level multiplied by a certain value to give the
resulting change in AD
Consumption Function
C = Yd
Consumption
Disposable Income
- Measures the rate at which consumption is changing when disposable income is changing. In a
geometric fashion the MPC is the slope of the consumption function
- Is the effect on domestic consumption of a change in income:
Consumption
C = 50 + .85YD
- This equation means that out of every extra dollar in disposable income 85 cents is spent on
consumption. Therefore the MPC = .85, the MPS = .15.
YD C MPC S MPS
100 135 -35
200 220 .85 -20 .15
300 305 .85 -5 .15
400 390 .85 10 .15
500 475 .85 25 .15
- Is the value by which the initial spending change is multiplied to give the total change in the output. (The
shift in the AD curve)
a) Total change in Output =
i. Initial change x spending multiplier
b) Spending Multiplier =
i. Total change in output (shift in the AD curve)
Initial change in spending
c) Spending Multiplier =
i. 1
MPW
- Average propensity to Consume is the ratio between a person's total and disposable income and
his/her total consumption
- Average Propensity to Save is the ratio between a person's total disposable income and his/her total
savings
Marginal Propensity
- Marginal Propensity to Consume is the ratio between a person's change in disposable income and his
consumption
- Marginal Propensity to Save is the ratio between a person's change in disposable income and his
change in savings
APC = C / Yd APS = S / Yd
1. Policy Delays:
a) Recognition Lag - is the amount of time it takes policy makers to realize that a policy is needed
b) Decision Lag - is the period that passes while an appropriate response is formulated and
implemented
c) Impact Lag - is the time that elapses between implementing the policy and having its effect on the
economy
2. Political Visibility:
a) Discretionary Fiscal Policy - highly visible elements of government activity.
3. Public Debt:
a) Is the total amount owed by the federal government as a result of its past borrowing
b) Public Debt Charges - is the amounts paid out each year by the federal government to cover the
interest charges on its public debt.
1. -
a) 1 million
b) 0.33
c) 1/MPW
2. -
a) SM = 1.67, shift to left by 6667
-(MPC x change in T) x 1 / mpw
b) SM = 1.25, shift to right by 6250
c) 3750
d) -66666.666667