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Multiplier Effect 3.13.14 (got 93% on the test)

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Department
Economics
Course
ECON 2010
Professor
All Professors
Semester
Fall

Description
3132014Multiplier effect An increase in autonomous expenditures the Y interceptindependent variablesC bar MPCTIG NX will lead to a greater increase in Y GDP such that Change in autonomous expenditure multiplierChange in GDP How will an increase in autonomous spending due to an increase in government spending affect the GDPAs the figure below shows increasing the autonomous spending due to an increase in the government spending This increase leads to a change in the y intercept and thus shifts the entire curve upward by the increase in autonomous spendingGovernment spending Increase in the Y intercept increase in autonomous spending increase in government spending change in autonomous spending The slope stays the same Next we need to calculate the change in GDP by looking at the intersection points with PAEY The curve labeled one represents the curve before the increase in government spending The curve labeled one intersects PAEY at GPD1 The curve labeled two represents the curve after the government spending increases The curve labeled two intersects PAEY at GDP2To calculate the change in GDP we must do the following GPD2GDP1 Change in GDP Now that we have both the change in GDP and the change in Autonomous spending we can now calculate the multiplierMultiplier Change in GDPChange in Autonomous spendingAnother way to calculate the change in GDP without having to graph it is to use the following equationChange in GDP Change in autonomous spending1MPCThis works because MPC marginal propensity to consume is the slope of the curves and represents the amount of discretionary income people spend per discretionary dollar earned
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