# Additional_Multiplier - a=a,T=T,I= I,G=G,X=X Y=a b(Y-T I G...

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1 The Multiplier Definition: the multiplier measures the response of output to a change in exogenous expenditure components. Exogenous Expenditure Components: those parts of private sector expenditures that are determined outside the economic model.

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2 Deriving the Multiplier Y = C + I + G + X Definitions: C = Consumption Expenditures I = Investment Expenditures G = Government Purchases X = Net Exports
3 Consumption C = a + b(Y – T), a > 0, 0 < b < 1 C Y a-bT

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4 Marginal Propensity to Consume: - measures the change in C associated with a change in income Y. MPC = C/ Y = b 0 < MPC < 1
5 Marginal propensity to Save: Measures the change in saving associated with a change in income Y. S = Y – C = Y – a – b(Y – T) S = -a + (1 – b)Y + bT MPS = S/ Y = 1 – b 0 < MPS < 1

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6 Exogenous Spending Components:

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Unformatted text preview: a=a,T=T,I= I,G=G,X=X Y=a+b(Y-T)+ I+G+X Solve for Y: Y-bY=a-bT+ I+G+X (1-b)Y=a-bT+ I+G+X 7 a-bT+ I+G+X Y= 1-b Government Spending Multiplier: 1 1G 1Y 1 1Y= , = >1 1-b 1G 1-b 8 1 1 I 1Y 1 1Y= , = >1 1-b 1 I 1-b Investment Spending Multiplier: Net Exports Multiplier: 1 1X 1Y 1 1Y= , = >1 1-b 1X 1-b 9 Tax Multiplier: 1-b1T 1Y-b 1Y= , = <0 1-b 1T 1-b Balanced-Budget Multiplier: 1G=1T 10 ( ) = G-b1T 1G-b1G 1Y= 1-b 1-b 1-b 1G 1Y= 1-b 1Y =1 1G Implication: if government purchases rise by a dollar, so does income. 11 Numerical Example Problem: compute the equilibrium level of income, Y. Numerical Values: a=100,b = .75,T=50, I=300,G=50,X=5 12 Y=100+.75(Y-50)+300+50+5 (1-.75)Y=455-50*.75 .25Y=417.5 Y=1670 Value of the Multiplier: 1/(1-b)=1/(1-.75) = 4...
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Additional_Multiplier - a=a,T=T,I= I,G=G,X=X Y=a b(Y-T I G...

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