ECF1200 Lecture Notes - Lecture 10: Automatic Stabilizer, Deflation, Aggregate Demand
Document Summary
Government purchases and tax multipliers (lo3: multiplier effect: the process by which an increase in autonomous expenditure leads to a larger increase in real gdp. The gov. decides to use discretionary fp to increase ad by spending an additional. billion to construct new rail systems in several states. Assuming that the construction materials are produced locally, we know that the answer is greater than billion because the initial increase in ad will lead to additional increases in income and spending. To build the railways, the gov. hires private construction firms. These firms will hire more workers to carry out the new construction projects. Newly hired workers will increase their spending on groceries, furniture, restaurant meals and other products. Sellers of these products will increase their production and hire more workers. The government purchases multiplier: an increase in government purchases will increase aggregate demand by more than the initial amount of the increase in purchases.
