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Lecture 3

ECO202Y5 Macro Economics Lecture 3 and 4.docx

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Department
Economics
Course
ECO202Y5
Professor
Vedran Dronjic
Semester
Fall

Description
ECO202Y5 Macro Economics – Lecture 3 Multiplier: amplifies changes to autonomous spending Change in G < Change in Y The multiplier=> Ripple effect -Circles: start from small and grow over time -Strength: start strong but become weaker -Ripples eventually die off ∆G=> example: Road improvements by Miller Group (4 billion) to ↑production=↑G=↑production=↑worker jobs=↑Incomes=↑consumption (Miller workers) =>↑incomes (producers)= ↑consumption (sales man) The 4 billion that is initially invested to Miller Group by the government is slowly helping out the other people such as public consumers. Workers will save some of the salary and consume the left over. The amount of money spent by the workers will become the salesman’s income. When the salesman income increase, their consumption will increase too. However this will “investment” will slowly die off, just like the ripple effect. Assume: MPC=0.8 4 billion x (0.8)=3.2 billion 3.2 billion x (0.8)=2.6 billion and so on… Mathematically: 1/1-C₁ Suppose: MPC=0.
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