Multipliers- 02/24/17

Multipliers

The Spending Multiplier
- initial change in spending ( C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand
- multiplier = change in AD
                    change in C, Ig, G, Xn/

Why does it happen?
-Expenditures + income flows continuously which sets off a spending increase in the economy
-Spending multiplier = 1            or        1

                                    1-MPC               MPS

-Multipliers are (+) when spending increases, and (-) when spending decreases

Tax Multiplier
-government taxes, the multiplier works in reverse b/c now money is leaving the circular flow
-tax multiplier is negative
- tax multiplier = -MPC      or     -MPC
                              1-MPC            MPS

-if there’s a tax cut, then the multiplier is + because there is now more money in the circular flow