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# Expenditure Multipliers

The expenditure multiplier is the measure of the change in aggregate production caused by changes in autonomous expenditure¹. It is the inverse of one minus the slope of the aggregate expenditure line. The expenditure multiplier shows how a small change in expenditure can create larger changes in aggregate output.  Expenditure multipliers can be separated into simple expenditure multipliers and complex expenditure multipliers. Only induced consumption is in the simple expenditure multiplier, while the complex expenditure multiplier includes other induced variables. The multiplier will be greater than 1.0 because a change in autonomous expenditure will change induced expenditure.

An expedniture multiplier is a crucial part of Keynsian economics and the usefulness of fiscal policy to stimulate sustainable economic growth. Consider an individual consumer that has been given \$100 to spend. When he spends it, it becomes the income of another individual. This second consumer will save a portion and spend a portion - for example he spends 40% of it. Assuming that all individuals in this economy have the same marginal propensity to consume of 40%, then this process continues. In this simple multiplier, we find that for every \$100 injected into the economy, the change in GDP will end up being approximately \$167. So even if the government has to eventually repay the \$100 through taxation, the economy still benefits through fiscal policy.

Complex expenditure multipliers have different combinations of induced components. Induced consumption, investment, and government purchases all raise the value of the expenditure multiplier, while induced taxes and imports decrease the expenditure multiplier’s value¹.

References:

### Increase In Government Taxes

A government is currently operating with an annual budget deficit of \$40 billion. The government has determined that: --The marginal propensity to consume is 0.75. --To eliminate an inflationary gap and take into account the resulting change in the price level, the government must generate a net leftward shift in the aggrega

### What is the multiplier effect?

What is the multiplier effect? Our expenditures are always greater than what our actual dollar value is. How does that work? Is this related?

### Calculate autonomous expenditure.

The spreadsheet lists the components of aggregate planned expenditure in the United Kingdom. The numbers are in billions of pounds. A B C D E F G 1 Y C I G X M 2 A 100 110 50 60 60 15 3 B 200 170 50 60 60 30 4 C 300 230 50 60 60 45 5 D 400 290 50 60 60 60 6 E 500 350 50 60 60 75 7 F 600 410 50

### Calculate autonomous expenditure.

The figure illustrates the components of aggregate planned expenditure on Turtle Island. Turtle Island has no imports or exports, the people of Turtle Island pay no income taxes, and the price level is fixed. a. Calculate autonomous expenditure. b. Calculate the marginal propensity to consume. c. What is aggregate planned e

### MCP

Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by \$25 billion? How large a tax cut would be needed to achieve this same increase in aggregate demand? Why the difference? Determi

### The IS Curve and a Steep Slope

We can expect the IS curve to get steeper as: 1)-money demand becomes less sensitive to the interest rate 2)-the marginal propensity to save increases 3)-investment becomes more sensitive to changes in the interest rate 4)-the income tax rate decreases 5)-the expenditure multiplier increases

### Economic reactions

An increase in the marginal propensity to _____will decrese the size of the expenditure multiplier (a) and therefore the IS curve will shift to the ____and become steeper. If people save more and spend less, firms will experience an increase in unintended inventories. Firms will respond by decresing production and national incom

### Economics

How can tax cuts help revive the economy? Explain. Write your individual answer to the question listed above minimum 300 words in APA style [use APA template in Doc Sharing], using correct economic terms covered in the discussions. Your answers must include fiscal policy, expansionary fiscal policy, tax multiplier, Aggrega

### Short Run Macro Model

Consider an economy characterized by the following equations: C = 500 + 0.75Y + 0.05W I = 150 where C is desired consumption, I is desired investment, W is household wealth, and Y is national income. a) Suppose W=10,000. Draw the aggerate expenditure function on a scale diagram along the 45 degree line. What is the eq

### Fed Practicies and Policies

1. Who issues (supplies) Treasury securities and why? 2. Who supplies reserves and why? 3. If the Fed increases its loans to banks at the discount window, what component of reserves rises? 4. If the Fed buys Treasury securities in the open market, what component of reserves rises? 5. Based on the answers above, expla

### Mpc

Suppose the government increases education spending by \$20 billion. How much additional consumption will this increase cause? Would a millionaire and a poor person have the same MPC? Show your work.

### Open economy aggregate expenditure model

Given the following variable in the open economy aggregate expenditure model, autonomous consumption (C0) = 200, autonomous investment (I0) =200, government spending (G0) = 100, export spending (X0) = 100, autonomous import spending (M0) = 100, taxes (T) = 0, marginal propensity to consume (c1) = 0.8, marginal propensity to inve

### A Discussion on the Multiplier Process

The economy starts at equilibrium and the MPC = 0.75. What would be the effect of a \$300 increase in government spending once all the rounds of the multiplier process are complete?

### Increasing Real Gross Domestic Product (GDP)

Suppose that the MPC is 0.85 and that the Government is planning to boost the economy to increase real GDP by \$2 trillion for the 2008 general elections. Assume that the current real GDP is \$13 trillion, by how much would the government need to spend to achieve this goal? Can this goal be achieved before November 2008 given that

### Olympic games in London in 2012

I am asked to show the possible costs and gains to the UK of holding the Olympic games in London in 2012 by using a graphical analysis of the multiplier model.

### Value of the multiplier & sum of saving

Suppose that the MPC is 0.8, while the sum of planned investment, government purchases, and net exports is \$500 billion. Suppose also that the government budget is in balance. What is the sum of saving and net taxes when desired spending equals real GDP? Explain. What is the value of the multiplier? Explain why the m

### Defining a Multiplier

Using the Multiplier could you please explain how the replenishment of business inventories will affect the GDP so sharply?

### Aggregate Expenditure Problem

5. Suppose AE = 1600 + 0.75Y. (20 marks) (a)Draw the aggregate expenditure curve. (b) What are the slope and the vertical axis intercept of the curve? (c) What is the multiplier? (d) What is the effect of \$100 cut in autonomous consumption on equilibrium income? Demonstrate your answer graphically. see attachment

### The Level of Real GDP Demanded

Assume the simple spending multiplier equals 10. Determine the size and direction of any shifts in the aggregate expenditure line, the level of real GDP demanded, and the aggregate demand curve for each of the following changes in autonomous spending: a. Autonomous spending rises by \$8 billion. b. Autonomous spending falls b

### Working with consumption, multipliers and planned investment

Definitions: c=level of consumer spending y=level of income s=level of savings If C=40+ .5Y a. Find the level of consumer spending and the level of savings for the following levels of income: 100, 200, and 300. b. What will be the equilibrium level of income when planned investment expenditure is equal to 60?