TOPICS
- Consumption and Saving
schedules
- The Multiplier Effect
- The Multiplier with Inflation
- The Complex Multiplier
OUTCOMES
Describe the
income-consumption and income-saving
relationships
Recognize, construct, and explain
the consumption and saving schedules.
Calculate and differentiate
between the average and marginal propensities to consume
(and save).
Provide an intuitive explanation
of the multiplier effect.
We know that GDP = C +
Ig + G + Xn.
If at full employment GDP equals $500 billion, but it is
currently at $400 billion, then what increase in
investment (I) is needed to achieve full employment? MPC
= 0.8
Calculate the multiplier and
changes in real GDP given information about changes in
spending and the marginal propensities.
Discuss why the actual multiplier
may differ from the theoretical examples (complex
multiplier).
Why might a payroll
tax cut have a bigger impact on GDP than a cut in income
tax rates? Is MPC the same at all income levels? OR If
you cut taxes on lower income people and raise the same
amount of taxes from higher income people, what effect,
if any, will it have on aggregate demand?
How does the spending
multiplier work in "reverse"?
Describe the reasons
for the instability in investment spending
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