Unit 3
2-26-17
MPC and MPS
Spending Multiplier effect
- initial change in spending (C,Ig,G,Xn) causes larger change in aggregate spending/ (AD)
- multiplier = Δin AD/Δin spending or ΔAD/ΔGDP
- why does this happen?
- expenditures and income flow continuously which set off spending increase in economy
- multiplier = 1/(1-MPC) or 1/MPS
- Multilier are (+) when there is an increase in spending and (-) when there is a decrease
- when govt taxes, the multiplier works in reverse
- bc now money is leaving circular flow
- Tax multiplier (note: it's negative)
- formula = -MPC/(1-MPC) or -MPC/MPS
- If there tax - cut, multiplier is positive bc there now more money in circular flow
- Range 1- employment is high, roduction is low
- Range 2- unemployment is medium out put is high
- Range 3 - output high unemployment
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