ECN 101 Lecture Notes - Lecture 22: Potential Output, Balanced Budget
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The multiplier (m) is the number by which the change in autonomous expenditure must be multiplied in order to obtain the size of the change in equilibrium level of income. Ie: if m = 5, i = 10, then y = 5 x 10 = 50. Y = 100 + 0. 8(100) + 0. 82(100) + 0. 83(100) = 500. Note: the multiplier is just 1 divided by (1 minus the slope) of the pae curve. Thus,at equilibrium (ie: pae = y): y = aem*(autonomous components) (slide 20) An increase in a component of autonomous expenditure, being part of aggregate expenditure, will increase pae by the same amount. As income rises, consumption is induced to rise by an amount dependent on the size of the. Mpc, as income is a component of consumption. (ie: similar to how we analyse a change in the pae curve above)
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