Chapter 13.4 Flashcards
The Importance of the Multiplier
What is the Keynesian Multiplier?
The change in real GDP divided by the initial change in expenditure
The Importance of the Multiplier
What is the rule of the multiplier?
It should be greater than 1 so the change in GDP is greater than the initial change in expenditure.
Understanding the Multiplier in Terms of Leakages and injections
Why does a change in expenditure produce a larger change in total AD and real GDP?
The initial change in expenditure produces a chain reaction of further expenditures with the effect of increasing AD and real GDP to have a greater value than the initial expenditure
Understanding the Multiplier in Terms of Leakages and injections
What is the marginal propensity to consume (MPC)?
The fraction of additional income that households spend on consumption of domestically produced goods and services
Understanding the Multiplier in Terms of Leakages and injections
What is the marginal propensity to save?
Fraction of additional income saved
Understanding the Multiplier in Terms of Leakages and injections
What is the marginal propensity to tax?
Fraction of additional income taxed
Understanding the Multiplier in Terms of Leakages and injections
What is the marginal propensity to import?
Fraction of additional income spent on imported goods and services
Understanding the Multiplier in Terms of Leakages and injections
What is the relation between the marginal propensities?
MPC+MPS+MPT+MPM=1
Understanding the Multiplier in Terms of Leakages and injections
How can the multiplier be written in terms of marginal propensities?
Multiplies=1/(1-MPC) or 1/(MPS+MPT+MPM)
Understanding the Multiplier in Terms of Leakages and injections
What is the relationship between the value of the MPC and the multiplier?
The larger the MPC, the greater the multiplier
Understanding the Multiplier in Terms of Leakages and injections
What is the relationship between the amount of leakages and the value of the multiplier?
The smaller the leakages, the greater the multiplier
How the Multiplier Relates to AD
What is autonomous spending?
Spending that has not been caused by a change in income
How the Multiplier Relates to AD
What is induced spending?
Spending caused by changes in income
How the Multiplier Relates to AD
What is the effect of the multiplier on AD based on?
The sum of autonomous and induced spending
How the Multiplier Relates to AD
How is the multiplier effect initiated?
By autonomous spending
The Effect of the Multiplier in Relation to the Price Level
What is the condition for the multiplier to have the greatest possible effect on real GDP?
Price level is constant
The Effect of the Multiplier in Relation to the Price Level
What happens to the multiplier when the price level begins to increase?
The increasing price level absorbs entire multiplier effect leading it to be 0
The Effect of the Multiplier in Relation to the Price Level
On what thinking is the multiplier based on?
Keynesian thinking
The Effect of the Multiplier in Relation to the Price Level
What does the multiplier allow the economy to do when in a recessionary gap?
Unemployed resources and spare capacity allow AD to increase without putting upward pressure on price level. Any autonomous increase in spending leads to a substantially larger increase in real GDP
