ECON 460 Lecture Notes - Lecture 5: Monetary System, Social Cost, Joseph Schumpeter
20 Sep 2013
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Chapter 10: the marginal propensity to consume and the multiplier. Employment can only increase pari passu with investment. (pari passu: latin: With equal step. side-by-side, at the same rate as. ) What proportion increase in y would you get from . He says mpc is 0. 8 in uk, you have multiplier of 5. If poor country: investment levels are low; small government; if gov increases spending; high mpc in small government; injection gets multiplied but generating injections is problematic. Rich: lower mpc because there is more saving; economy not that responsive to injections; larger government so it doesn"t take big % increase to cause big. Marginal propensity to consume: d cw / d yw. Yw = cw + iw = k iw where 1 (1/k) = mpc. Call k the investment multiplier. k = 1/(1 mpc). If saving is the pill and consumption is the jam, the extra jam has to be proportioned to the size of the additional pill.
