1.) MULTIPLIERS
a.) The multiplier = 1 / (1  MPC) = 1 / MPS where: MPC = Marginal Propensity to Consume MPS = Marginal Propensity to Save
NOTE: This is also known variously as "the spending multiplier" or "the expenditure multiplier."
b.) Tax cut multiplier = MPC / (1  MPC) NOTE: The above formula for the tax cut multiplier assumes that net taxes (T) are only
collected from consumers, and that they are collected in the form of a lump sum (i.e., taxes are NOT collected in the form of an
income tax). Calculate multiplier = 1/(1MPC) = 1/MPS. Calculate Tax Cut Multiplier = MPC/(1MPC).
2.) FORMULAS FOR FINDING THE CHANGE IN EQUILIBRIUM GDP
a.) In an incomeexpenditure model (i.e., we hold P fixed): Change in Y
E
= the multiplier x change in autonomous desired spending,
where: Y
E
= the equilibrium level of GDP.
b.) In an aggregate demandaggregate supply (ADAS) model: Change in Q
E
= (k x the multiplier) x change in autonomous desired
spending, where: Q
E
= the equilibrium level of real GDP NOTE: k is a number that modifies the multiplier, depending on the shape of
the aggregate supply curve: 0 ≤ k ≤ 1.
In the case of a perfectly horizontal AS curve, k = 1.
3.) REAL GDP GAPS
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This note was uploaded on 04/02/2008 for the course ECON 2010 taught by Professor Aljamal during the Fall '06 term at Western Michigan.
 Fall '06
 ALJAMAL
 Marginal Propensity To Consume

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