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1. 1. The Multiplier Definition: the multiplier measures the response of output to a change in exogenous expenditure components. Exogenous Expenditure Components: those parts of private sector expenditures that are determined outside the economic model.
2. 2. Deriving the Multiplier Y = C + I + G + X Definitions: C = Consumption Expenditures I = Investment Expenditures G = Government Purchases X = Net Exports
3. 3. Consumption C = a + b(Y – T), a > 0, 0 < b < 1 C Y a-bT
4. 4. <ul><li>Marginal Propensity to Consume: </li></ul><ul><li>measures the change in C associated </li></ul><ul><li>with a change in income Y. </li></ul><ul><li>MPC =  C/  Y = b </li></ul><ul><li>0 < MPC < 1 </li></ul>
5. 5. Marginal propensity to Save: Measures the change in saving associated with a change in income Y. S = Y – C = Y – a – b(Y – T) S = -a + (1 – b)Y + bT MPS =  S/  Y = 1 – b 0 < MPS < 1
6. 6. Exogenous Spending Components: Solve for Y:
7. 7. Government Spending Multiplier:
8. 8. Investment Spending Multiplier: Net Exports Multiplier:
9. 9. Tax Multiplier: Balanced-Budget Multiplier:
10. 10. Implication: if government purchases rise by a dollar, so does income.
11. 11. Numerical Example Problem: compute the equilibrium level of income, Y. Numerical Values:
12. 12. Value of the Multiplier: 1/(1-b)=1/(1-.75) = 4