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. Deriving the Multiplier Y = C + I + G + X Definitions: C = Consumption Expenditures I = Investment Expenditures G = Government Purchases X = Net Exports

3. Consumption C = a + b(Y – T), a > 0, 0 < b < 1 C Y a-bT

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. Exogenous Spending Components: Solve for Y:

7. Government Spending Multiplier:

8. Investment Spending Multiplier: Net Exports Multiplier:

9. Tax Multiplier: Balanced-Budget Multiplier:

10. Implication: if government purchases rise by a dollar, so does income.

11. Numerical Example Problem: compute the equilibrium level of income, Y. Numerical Values:

12. Value of the Multiplier: 1/(1-b)=1/(1-.75) = 4