MACRO Chp. 8: the spending multiplier

Multiplier process

the total change in output is greater than the initial change in spending. one person's spending is another person's income. when income changes, spending changes. the total change in income is the sum of the changes in income in each round of the multiplier process.

marginal propensity to import

change in imports over change in income. how much imports change when income changes..

Keynesian cross diagram

shows that the initial change in AD causes a much larger change in total GDP however, ignores inflation.

size of multiplier

spending does change when income changes, for this reason the size of the multiplier is greater than 1. the size of the multiplier depends on how much spending changes when income changes.

proportional taxes

taxes that change as income changes

multiplier

tells us how much GDP changes when there is some initial change in aggregate spending. it is the ratio of the total change in GDP to the initial change in aggregate spending.

marginal propensity to consume

the change in income= the change in disposable income times the MPC

closed economy multiplier

the change in output and income is much smaller in the presence of imports. economists say: the open economy multiplier is smaller than the closed economy multiplier. fluctuations in output and income are smaller when part of our income is spent on imports.

leakage

the effect of proportional taxes on the multiplier process. part of the potential for spending is "leaking out" of the economy when taxes are paid.

proportional tax rate

the share of income that is paid in taxes

lump-sum taxes

there is no change in taxes when income changes. a constant dollar amount regardless of income.

multiplier effect

when aggregate demand increases, equilibrium income changes by more than the initial change in aggregate demand, due to the multiplier effect. (as seen in the Keynesian cross diagram)