THE MULTIPLIER

THE MULTIPLIER - SECTION 18: THE AUTONOMOUS SPENDING...

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SECTION 18: THE AUTONOMOUS SPENDING MULTIPLIER IN A MODEL WITH NO TAXES
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DEFINITION: AUTONOMOUS SPENDING Autonomous spending is spending which is not induced by, or determined by, the level of income Some consumption spending is autonomous. That is, it will occur regardless of the level of income in the economy. INDUCED SPENDING Some consumption spending is related to the level of income. As income increases in the economy, the amount of consumption spending increases. This increase in consumption spending is called induced consumption spending .
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Some investment spending is autonomous. That is, it will take place regardless of the level of income in the economy. Some investment spending is related to the level of income Most government spending is autonomous.
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Suppose autonomous spending increases in the economy. EXAMPLES: CONSUMPTION Consumers decide to buy more cars. INVESTMENT A corporation decides to build a new factory. GOVERNMENT SPENDING The government decides to build a new highway. EXPORTS Foreigners decide to buy more American cars or make more visits to Disneyland.
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If autonomous spending increases, this causes an increase in output. The increased in output causes an increase in the incomes of the people producing the output. This increase in income causes an increase in consumption spending. This is called induced consumption spending .
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This induced consumption leads to another increase in output and another increase in the incomes of the producers. This causes additional induced consumption spending. This process repeats itself over and over.
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CONCLUSION: Any increase in autonomous spending leads to a multiple increase in output.
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EXAMPLE: Suppose autonomous spending increases by $10 billion. As a result, suppose output eventually increases by $30
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THE MULTIPLIER - SECTION 18: THE AUTONOMOUS SPENDING...

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