Aggregate Expenditure and The multiplier Flashcards
What does the Multiplier do
Influences AE by a fall in investment making a magnified effect on output
Whats the formula for AE
AE=Y=C+I
Where Y is income, C is consumption and I is investment
What’s the formula for consumption
C =a+bY
Through combining the formulas for AE and C what is the formula for the multiplier
Multiplier = 1/1-MPC
MPC is the slope of the consumption function
What is the tax function and what do the components represent
T=t0+tY
Where t0 denotes autonomous taxes not related to income such as VAT
t denotes the marginal propensity to tax given by the change in T/change in Y
What is the formula for government budget deficit and surplus
Deficit = G-T
Surplus = T-G
When including G as well what is the formula for AE and what is the multiplier
AE=Y=C+I+G
The Multiplier = 1/1-b(1-t)
Where t is the MPT and b is the MPC
What is fiscal policy and what example can be used with Keynes
Fiscal policy is discretionary changes in G and T
Keynes suggested that increasing G could get an economy out of recession
What are the limitations of fiscal policy
Time lags means that swift policy changes are difficult
Forecasting accuracy is not reliable
Public investment is irreversable