1. Aggregate Expenditures: The multiplier Chapter 10 Part 2 of Unit 5

2. Read Page 199  Squaring the Economic Circle

3. The Multiplier Effect  Small change in investment leads to a large change in output and income.  The multiplier determines how large the change will be  Multiplier = change in GDPr / initial change in spending  Ex. A $5 billion change in Ig led to a $20 billion change in GDP.  What is the multiplier? 4444

4. Rationale  The economy has continuous flows of expenditure & income—ripple effect  Income received by person A comes from $ spent from person B.  Change in income will cause both C and S to vary in the same direction as the initial change in income (increase or decease) and by a fraction of that change.

5. Rationale continued  The fraction of the change in income that is spent is called the MPC  The fraction of the change in income that is saved is called the MPS

6. Multiplier & Marginal Propensities  The size of the MPC and the multiplier are directly related  The size of the MPS & the multiplier are inversely related  M = 1 / MPS  or  M = 1 / (1-MPC)

7. Significance of the Multiplier  A small change in investment plans or consumption savings plans can trigger a much larger change in the equilibrium level of GDP

8. Generalizing the Multiplier  We have seen the simple multiplier  The multiplier can be generalized to include other “leakages” from the spending flow besides savings  Realistic multiplier includes taxes and imports