Class Notes - 11-14-07

Class Notes - 11-14-07 - Macroeconomics Class Notes...

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Macroeconomics – Class Notes – 11/14/07 MULTIPLIER EFFECT MPC MULTIPLIER .5 2 .75 4 .8 5 .9 10 If the initial increase in aggregate demand was $100 billion with a multiplier of 5, the total increase is $500 billion. (Change in Government spending) * (multiplier) Short-run aggregate supply would have to be perfectly elastic (horizontal) in order to get the full increase due to the aggregate demand and multiplier process Crowding rate leads to an increase in Government spending, but leads to increase in the interest rate, which in turn leads to a fall in investment. o So an increase in Aggregate Demand from greater government spending is small because of crowding out (less investments) o Increase in Government sector of spending and a decrease in private sector of spending USING POLICY TO STABILIZE THE ECONOMY ( NOT IN BOOK!) Monetarists argue against stabilizing the economy (government intervention) o They are worried about inflation – falling into recession Should
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Class Notes - 11-14-07 - Macroeconomics Class Notes...

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