+ The Magic of the Multiplier Demonstrate understanding of concepts: Calculate aggregate changes in GDP based from tax and spending multipliers.

Slides:

Advertisements

Similar presentations

Chapter 21 AGGREGATE EXPENDITURE and EQUILIBRIUM OUTPUT

Advertisements

Consumption Math Problems Warm-Up/Review  What are the three spending sectors?  Which one makes up the most of the GDP?  Use the dictionary to define.

Aggregate Expenditure

Chapter 13 Fiscal Policy. The Multiplier Formula (cont’d) Can use this formula to find the impact on real GDP of any given change in aggregate demand:

AE = C + I + G + NX AE = GDP = Y = C + I + G + NX

MPC, MPS, and Multipliers

Fun!!! With the MPC, MPS, and Multipliers

Income, Consumption, and Saving

Macroeconomic Measurement & Basic Concepts

The Multiplier Effect and Crowding Out Slides By John Dawson and Kevin Brady Begin Interactive Examples CoreEconomics, 2e To navigate, please click the.

Multiplier Macroeconomics

AP Macroeconomics Fun!!! With the MPC, MPS, and Multipliers.

MPC, MPS, and Multipliers

Condensed Chapter 9 Schiller Component Parts of GDP?

AP Macroeconomics Consumption & Saving.

9 - 1 Copyright McGraw-Hill/Irwin, 2002 Private Closed Economy Consumption and Saving Nonincome Determinants of Consumption and Saving Terminology, Shifts,

Module Income and Expenditure

Module 16D-The Magic of the Multiplier J.A.Sacco.

Unit 3 Aggregate Demand and Aggregate Supply: Fluctuations in Outputs and Prices.

Household-Consumption Part 1. What is GDP? Gross Domestic Product (GDP)-Gross Domestic Product (GDP)- is the nation’s expenditure on all the final goods.

THE GOVERNMENT AND FISCAL POLICY Chapter THE GOVERNMENT AND FISCAL POLICY Government can affect the macroeconomy through two policy channels: fiscal.

Macro Chapter 8 Presentation 1- Marginal Propensities and the Multiplier.

Module 21 Fiscal Policy and The Multiplier. Multiplier Effects of an Increase in Government Purchases of Goods and Services If consumption or Investment.

The relationships between Income and Saving and Income and Consumption Consumption is the largest component of AD What determines a person’s level of.

Marginal Propensity to Consume ● Measures the ratio of the change in consumption to the change in disposable income that produces the change in consumption.

Mr. Mayer AP Macroeconomics Consumption & Saving.

Basic Macroeconomic Relationships 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Consumption, Savings, and Aggregate Expenditures

Consumption, Savings, and Aggregate Expenditures.

Income-Expenditure Model recession Great Recession.

Consumption & Savings MPC, MPS & Multiplier Analysis.

Basic Macroeconomic Relationships. Chapter 9 Figure 9.1.

The Aggregate Expenditures Model 11 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Basic Macroeconomic Relationships 9 C H A P T E R.

MPC = Change in Consumption Change in Income Marginal Propensity to Consume = MPC MPC = 750 / 1000 = 0.75 “Disposable income” Real terms MPC does not equal.

1 Objective – Students will be able to answer questions regarding multipliers. SECTION 1 Chapter 10- Multipliers © 2001 by Prentice Hall, Inc.

Income and Expenditure

National Income and Price Determination Macro Unit III.

Fun!!! With the MPC, MPS, and Multipliers

Copyright © 2008 Pearson Education Canada Chapter 6 Determination of National Income.

1. Specifically, what aspects of Say’s Law did Keynes criticize and for each point he criticized, what was his offered solution? 2. How did the Great Depression.

AP Economics Mr. Bernstein Module 16: Income and Expenditure February 2016.

Chapter 27 Basic Macroeconomic Relationships. Income- Consumption-Saving Links Let’s introduce some assumptions: 1. Two-sector economy: households and.

Chapter 10 Basic Macroeconomic Relationships Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior.

Basic Macroeconomic Relationships 10 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

 Consumption and saving  Primarily determined by Disposable Income (DI)  Direct relationship  Consumption schedule (C)  Planned household spending.

Mehdi Arzandeh, University of Manitoba PowerPoint Presentation by.

The Aggregate Expenditures Model. Aggregate Expenditure Model (Also known as the “Keynesian cross model” The amount of goods and services produced and.

1. Marginal Propensity to Consume (MPC) = ∆ consumption (C)/ ∆ Disposable Income (DI) DI and Disposable Personal Income (DPI) can be used interchangeably.

Income, Expenditure and the Multiplier. AP Macroeconomics Consumption & Saving.

 Disposable is your net income Your save or spend that income  Marginal Propensity to Consume (MPC) Is the increase in consumer spending when disposable.

2 nd Seating Chart (Front of Class) RachaelScottShelby Smith Paperw. HannahZach P.Heather Zach S. Bathroom JoshuaDavidWilliamJuhiAmanda Attendanc Shelby.

Student-Centered Learning. Module Income and Expenditure 16.

THE MULTIPLIER UNDERSTAND THE MULTIPLIER EFFECT BY ANALYZING A REAL WORLD EXAMPLE DEMONSTRATE UNDERSTANDING OF HOW THE MPC AND MPS ARE USED TO CALCULATE.

Basic Macroeconomic Relationships Please listen to the audio as you work through the slides.

Fun!!! With the MPC, MPS, and Multipliers Special thanks to Mr. David Mayer & Mr. Ken Norman from whom I adapted this power point.

The Multipliers Homework

Mr. Thornton AP Macroeconomics

Fun!!! With the MPC, MPS, and Multipliers

Mr. Rupp AP Macroeconomics

Mr. Mayer AP Macroeconomics

If the MPC is .90 and the government spends $400 Billion dollars, what is the multiplied effect on GDP? 1/1-MPC = 10; $400/10 = $4,000 Billion.

Fiscal Policy Related Formulas:

Multipliers & Fiscal Policy

McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

Mr. Mayer AP Macroeconomics

Fun!!! With the MPC, MPS, and Multipliers

Fun!!! With the MPC, MPS, and Multipliers

Building the Aggregate Expenditures Model

Presentation transcript:

+ The Magic of the Multiplier Demonstrate understanding of concepts: Calculate aggregate changes in GDP based from tax and spending multipliers

+ ECONO-ISLAND

+ MULTIPLIER EFFECT

+ THE MULTIPLIER Δ Y=M× Δ S Looking to see how a change in spending will impact aggregate output Assuming no taxation, foreign market interaction, or simultaneous spending changes Example: US gov’t decides to spend $100B on new high-speed rail system 1 1 − MPC Example: MPS =.60 Δ GDP Real = ? × $100B = total change in real GDP The Multiplier formally represents the ratio of total change in GDP to the initial change in spending, thus: M = ΔYΔSΔYΔS

+ APC & APS vs. MPC & MPS You already know about MPC & MPS… APC & APS: average propensities to consume & save Ratios of total spending/consumption or saving to disposable income APC = APS = C DI S DI *These #s can be greater than 1!

+ TAX MULTIPLIER Taxation makes the multiplier work in reverse…there’s money leaving the circular flow that households will no longer have the opportunity to spend Disposable income is decreasing, ultimately Aggregate output decreases when taxes are increased, and vice-versa Formula: TM = *Note: If there is a tax cut, then the multiplier will be positive…more money in the economy (greater DI) − MPC MPS

+ TAX MULTIPLIER and GDP All we do is calculate how our consumption will changed based on the new tax level (please pay careful attention to whether the tax rate is increasing or decreasing) Example: Let's say that we are experiencing a recession and the government decreases taxes by $25 billion. Let's also assume that the MPC equals.75. By how much will GDP increase? Solution: Because the MPC equals.75, the regular (spending) multiplier equals 4, and the tax multiplier equals -3. The spending multiplier = 1 / (1 minus.75) = 1 /.25 = 4. The tax multiplier equals 4 minus 1 with a negative sign: -(4 - 1) = -3. To get the increase in GDP, we multiply the multiplier by the decrease in taxes: Change in GDP = -3 x -$25 billion = +$75 billion.

+ THE KING’S MULTIPLIER TEST “The King took the treatise and had it printed for every islander. He then ordered the old professor to make up a series of questions to see if the subjects understood the multiplier.” Get with a partner, take out one cell phone per group, and get ready to stake your place on Econoland Island!

+ SAMPLE PROBLEMS Choose 1 to complete: 1. Assume US citizens spend 90¢ for every $ they earn. Further, assume that the real interest rate (r%) decreases, causing a $50 B increase in gross private investment. Calculate the effect of this $50 B increase on GDP. 2. Assume Germany raises taxes by €200 B. Further, assume Germans save 25% of the change in their disposable income. Calculate the effect of this €200 tax increase on GDP. 3. Assume the Japanese spend 4/5 of their disposable income. Further, assume the Japanese gov’t increases spending by ¥50 T and, in order to maintain a balanced budget, simultaneously increases taxes ¥50 T. Calculate the two changes effects on GDP.

+ ANSWERS #1

+ ANSWERS #2

+ ANSWERS #3