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/(1-MPC) = 1/MPS. Calculate Tax Cut Multiplier = MPC/(1-MPC). 2.) FORMULAS FOR FINDING THE CHANGE IN EQUILIBRIUM GDP a.) In an income-expenditure 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 demand-aggregate supply (AD-AS) 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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