ECO100Y1 Lecture Notes - Lecture 15: Parsec, Tax Rate

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Autonomous expenditure varies independent of y [where y = national income/output] Induced expenditure varies due to changes in y. New intercept of ae schedule (see previous diagram) The multiplier: concept: y = multiplier * auto(cid:374)o(cid:373)ous e(cid:454)pe(cid:374)diture. The multiplier: value: slope of ae schedule. Observation: in this model, slope of ae schedule is mpc, so multiplier is 1/(1-mpc) simple model only. Lecture: where z is (cid:862)(cid:373)argi(cid:374)al prope(cid:374)sit(cid:455) to spe(cid:374)d out of national income(cid:863) z. Y where (cid:373)p(cid:272) is (cid:862)(cid:373)argi(cid:374)al prope(cid:374)sit(cid:455) to (cid:272)o(cid:374)su(cid:373)e out of households" disposa(cid:271)le. Multiplier= income(cid:863: simple model, mpc=z (cid:373)p(cid:272) z for e(cid:454)te(cid:374)ded (cid:373)odel. If mps increases from 0. 1 to 0. 2, then mpc falls from 0. 9 to 0. 8: multiplier= Induced consumption spending = (cid:373)p(cid:272)* y: mpc , induced consumption spending at each round , so income/output [=induced consumption spending] . At each round, the amount of induced consumption spending is less than before and, hence, the amount of new income [output] is less than before.

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