chapter 11 econ104 parks the output multiplier. the multiplier effect when an autonomous component...
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![Page 1: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/1.jpg)
Chapter 11Econ104 Parks
The Output MultiplierThe Output Multiplier
![Page 2: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/2.jpg)
The multiplier effect
• When an autonomous component of Aggregate Demand changes, equilibrium output (Y) will change.
• The change in output will be even larger than the initial change in Aggregate Demand.
• This result for the change in Y to be greater than the initial change in Aggregate Demand is known as the multiplier effect.
• When an autonomous component of Aggregate Demand changes, equilibrium output (Y) will change.
• The change in output will be even larger than the initial change in Aggregate Demand.
• This result for the change in Y to be greater than the initial change in Aggregate Demand is known as the multiplier effect.
![Page 3: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/3.jpg)
Calculating the Size of the Multiplier Effect
• The size of the multiplier effect is given by:
where the (simple) output multiplier is defined as 1/(1-MPC).
• The size of the multiplier effect is given by:
where the (simple) output multiplier is defined as 1/(1-MPC).
![Page 4: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/4.jpg)
The simple output multiplier
• The simple output multiplier assumes– there are no taxes based on income– all expenditures are for domestically produced
goods and services– the price level is fixed
• The simple output multiplier assumes– there are no taxes based on income– all expenditures are for domestically produced
goods and services– the price level is fixed
![Page 5: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/5.jpg)
How and Why the Multiplier Works
• When Aggregate Demand rises, output and hence income rise.
• The rise in income allows people to consume more goods and services.
• This is called "income-induced" consumption and it raises Aggregate Demand even more.
• When Aggregate Demand rises, output and hence income rise.
• The rise in income allows people to consume more goods and services.
• This is called "income-induced" consumption and it raises Aggregate Demand even more.
![Page 6: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/6.jpg)
Example: University builds a new residence hall worth $100 million. MPC=0.8
![Page 7: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/7.jpg)
© OnlineTexts.com p. 7
• Comments:
• This is a period by period analysis. A book exercise.
• The change in investment must be a permanent change of $100 to get the increase in output of $500. We do not know the effect of changing investment by $100 in period 1 and no change thereafter – economic recovery act anyone?
• Comments:
• This is a period by period analysis. A book exercise.
• The change in investment must be a permanent change of $100 to get the increase in output of $500. We do not know the effect of changing investment by $100 in period 1 and no change thereafter – economic recovery act anyone?
![Page 8: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/8.jpg)
The Output Multiplier with Proportional Taxes
• A proportional tax is a constant percent of income tax– If income is taxed at a 20 percent rate, then t =
0.20.
• The formula for the output multiplier when proportional taxes are present, is:
• A proportional tax is a constant percent of income tax– If income is taxed at a 20 percent rate, then t =
0.20.
• The formula for the output multiplier when proportional taxes are present, is:
![Page 9: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/9.jpg)
© OnlineTexts.com p. 9
• APE = C + I + G + (N-X)
• C = CA + mpc*DI
• DI = Y*(1-t)
• Equilibrium at Y = APE
• Yeq = Autonomous expeditures/(1-mpc*(1-t))
• APE = C + I + G + (N-X)
• C = CA + mpc*DI
• DI = Y*(1-t)
• Equilibrium at Y = APE
• Yeq = Autonomous expeditures/(1-mpc*(1-t))
![Page 10: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/10.jpg)
Proportional taxes reduce the size of the multiplier effect.
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The Output Multiplier with Imports
• When income rises, demand for foreign goods and services also rises, lowering the demand for U.S. goods & services and dampening the multiplier effect.
• The marginal propensity to import (MPI) is the change in imports divided by the change in disposable income.
• The output multiplier without proportional taxes but accounting for imports is:
• When income rises, demand for foreign goods and services also rises, lowering the demand for U.S. goods & services and dampening the multiplier effect.
• The marginal propensity to import (MPI) is the change in imports divided by the change in disposable income.
• The output multiplier without proportional taxes but accounting for imports is:
![Page 12: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/12.jpg)
The Output Multiplier with Price Level Change
• For this slide only, we relax the assumption that the price level is fixed.
• When the AD curve shifts and the AS curve is upward sloping, the multiplier effect is smaller.
• The economy moves from point A to point C, instead of point B.
• For this slide only, we relax the assumption that the price level is fixed.
• When the AD curve shifts and the AS curve is upward sloping, the multiplier effect is smaller.
• The economy moves from point A to point C, instead of point B.
![Page 13: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/13.jpg)
The Output Multiplier with Price Level Change
• For this slide only, we relax the assumption that the price level is fixed.
• When the AD curve shifts and the AS curve is upward sloping, the multiplier effect is smaller.
• The economy moves from point A to point C, instead of point B.
• For this slide only, we relax the assumption that the price level is fixed.
• When the AD curve shifts and the AS curve is upward sloping, the multiplier effect is smaller.
• The economy moves from point A to point C, instead of point B.
![Page 14: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/14.jpg)
The Multiplier Effect and a Temporary Change in Aggregate Demand
• If the change in Aggregate Demand is temporary, then the change in output is temporary.
• Examples include road or building repairs.
• If the change in Aggregate Demand is temporary, then the change in output is temporary.
• Examples include road or building repairs.
![Page 15: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/15.jpg)
The Multiplier Effect and a Temporary Change in Aggregate Demand
•Equilibrium output rises initially, but the impact dampens out over time.
•Equilibrium output rises initially, but the impact dampens out over time.
![Page 16: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/16.jpg)
The Multiplier Effect and a Permanent Change in Aggregate Demand
• If the change in Aggregate Demand is permanent, the equilibrium level of output in the economy is permanently higher.
• Examples: new school or prison.
• If the change in Aggregate Demand is permanent, the equilibrium level of output in the economy is permanently higher.
• Examples: new school or prison.
![Page 17: Chapter 11 Econ104 Parks The Output Multiplier. The multiplier effect When an autonomous component of Aggregate Demand changes, equilibrium output (Y)](https://reader031.vdocuments.site/reader031/viewer/2022032309/56649d235503460f949f9d32/html5/thumbnails/17.jpg)
The Multiplier Effect and a Permanent Change in Aggregate Demand
• The overall equilibrium level of output in the economy rises by the initial change in AD times the size of the output multiplier.
• The overall equilibrium level of output in the economy rises by the initial change in AD times the size of the output multiplier.