Chapter9Summary - 1 Chapter 9 Summary Tucker,...

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Chapter 9 Summary Tucker , Macroeconomics for Today , 5th Edn 1. The multiplier provides the explanation for why small changes in I(p) (or other changes in aggregate expenditures AE) can lead to much larger changes in GDP. This is the case because increases in investment expenditures lead to increased production of GDP, which in turn leads to an equivalent increase in the disposable income of households. Some fraction (called the MPC) of this increase in disposable income will be spent by households on consumer goods. This additional demand for consumer goods will cause additional consumer goods to be produced, and so even more payments are made to resource owners, who in turn spend some part of the increase in their disposable incomes. So, the multiplier explains why small changes in AE lead to much larger changes in GDP. Be sure to review the multiplier table in the lecture notes for Chapter 9. 2. The numerical value of the multiplier is given by the reciprocal of the marginal propensity to save. If the MPS = 1/5, then the multiplier = 1 / (1/5) = 5. In the sample problem in 4. above, the MPC = 4/5, so the MPS = 1/5, and so the multiplier is 5. Note that in that problem a $1 rise in investment expenditures (from 50 to 51, will cause Y(e) to rise by 5, from 400 to 405. This illustrates the multiplier effect. The multiplier is an important topic that we will use again and again throughout the course. If you do not understand why a small change (e.g., $1) in I(p) can give rise to larger changes in GDP, you need to review the
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This note was uploaded on 04/02/2008 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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Chapter9Summary - 1 Chapter 9 Summary Tucker,...

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