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Lecture 30

# Lecture 30-The Multiplier

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University of Toronto St. George

Economics

ECO102H1

Jack Carr

Winter

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Thursday, February 4th, 2009. The Multiplier Autonomous Expenditure Ù Independent of charges in Y [GDP] Induced Expenditure Ù Varies as Y [GDP] varies Change in Autonomous Expenditure => shift in AE Schedule => new intercept of AE Schedule The Multiplier Concept 1. ¨ C = 10 + 0.72 Y I = 25 G = 17 X = 24 => X ± M = NX = 24 ± 0.1 Y M = 0.1 Y Extended Model: Numerical Example Equilibrium National Income: Y = 200 Y C = 10 + 0.72 * Y I = 25 G = 17 X ± M = 24 ± 0.1 * Y. AE = C + I + G + X ± M 100 82 25 17 14 138 200 154 25 17 4 200 300 226 25 17 -6 262 www.notesolution.com
Student Exercise 1. Why is Y = 300 not the equilibrium level of national income (output)? 2. At Y = 300, is desired inventory investment equal to actual inventory investment? The Multiplier 2.1 ¨, !¨ Multiplier = ___1 ___ = 2.63 1 ± 0.62 Extended Model AE = C + I + G + X ± M = 76 + 0.62 Y Autonomous Expenditure = 76 Comparing the Simple Model and the Extended Model Example Simple Model C + I ± AE Multiplier = 10 Extended Model C + I + G + X ± M Multiplier = 2.63 76 200 AE Y National Output Aggregate Planned Expenditure 45° www.notesolution.com
Why the difference? 1. Technical answer: slope of AE schedule is different 2. Intuitive answer: at each round, induced expenditure is smaller in extended model Why is multiplier smaller? ¨ Autonomous Expenditure Round #1 ¨I = 10 !¨ shift in AE Schedule => new intercept of AE Schedule The Multiplier Concept 1. <2:O9L5OL07 Autonomous Expenditure Example: :943424:8[503L9:70, 2. Induced consumption expenditure is key Round #1 I = 10 < Round #2 25. < Y = 9 Round #3 25. < <8.1 ** mpc = marginal propensity to consume Round #1 Autonomous Expenditure Round #2 Induced Consumption Expenditure Round #3 Induced Consumption Expenditure ** expenditure = income www.notesolution.com

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