Chapter 11 - chapter: 11 > IncomeandExpenditure 1 of 45...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
1 of 45 chapter: 11 >> Income and Expenditure
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 of 45 WHAT YOU WILL LEARN IN THIS CHAPTER The nature of the multiplier , which shows how initial changes in spending lead to further changes. The meaning of the aggregate consumption function , which shows how disposable income affects consumer spending How expected future income and aggregate wealth affect consumer spending The determinants of investment spending, and the distinction between planned investment and unplanned inventory investment
Background image of page 2
3 of 45 WHAT YOU WILL LEARN IN THIS CHAPTER How the inventory adjustment process moves the economy to a new equilibrium after a change in demand Why investment spending is considered a leading indicator of the future state of the economy
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 of 45 The Multiplier: An Informal Introduction The marginal propensity to consume, or MPC, is the increase in consumer spending when disposable income rises by $1. The marginal propensity to save, or MPS, is the increase in household savings when disposable income rises by $1.
Background image of page 4
5 of 45 The Multiplier: An Informal Introduction Increase in investment spending = $100 billion + Second-round increase in consumer spending = MPC × $100 billion + Third-round increase in consumer spending = MPC 2 × $100 billion + Fourth-round increase in consumer spending = MPC 3 × $100 billion • • • • • • • • • • • • Total increase in real GDP = (1 + MPC + MPC2 + MPC3 + . . .) × $100 billion
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 of 45 The Multiplier: An Informal Introduction So the $100 billion increase in investment spending sets off a chain reaction in the economy. The net result of this chain reaction is that a $100 billion increase in investment spending leads to a change in real GDP that is a multiple of the size of that initial change in spending. How large is this multiple?
Background image of page 6
7 of 45 The Multiplier: Numerical Example Rounds of Increases of Real GDP When MPC = 0.6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 of 45 The Multiplier: Numerical Example In the end, real GDP rises by $250 billion as a consequence of the initial $100 billion rise in investment spending: 1/(1 − 0.6) × $100 billion = 2.5 × $100 billion = $250 billion
Background image of page 8
9 of 45 The Multiplier: An Informal Introduction An autonomous change in aggregate spending is an initial change in the desired level of spending by firms, households, or government at a given level of real GDP. The multiplier is the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
10 of 45 ►ECONOMICS IN ACTION The Multiplier and the Great Depression The concept of the multiplier was originally devised by economists trying to understand the Great Depression. Most economists believe that the slump from 1929 to 1933 was driven by a collapse in investment spending. But as the economy shrank, consumer spending also fell sharply, multiplying the effect on real GDP. In 1929, government in the United States was very small by
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/04/2011 for the course ECON 2006 at Virginia Tech.

Page1 / 45

Chapter 11 - chapter: 11 > IncomeandExpenditure 1 of 45...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online