Transcript 1. Marginal Propensity to Consume (MPC) = * consumption (C

The Multipliers Homework
1. Marginal Propensity to Consume (MPC) =
∆ consumption (C)/ ∆ Disposable Income (DI)
DI and Disposable Personal Income (DPI) can be
used interchangeably.
2. Marginal Propensity to Save (MPS) =
∆ savings (S)/ ∆ Disposable Income (DI)
MPC + MPS = 1.
3. Autonomous Expenditure Multiplier (The Multiplier)
1/ 1-MPC
OR
1/MPS
OR
∆ Real GDP/ ∆ Autonomous Expenditure (C, I, or G)
4. Government Spending/ Purchases Multiplier =
Same as the Multiplier!
WARNING! If the government changes transfer
payments (Social Security, Welfare, Student Loans)
only then the multiplier will be smaller because the
recipients of the payments will consume some of the
payments and SAVE some of the payments.
5. Transfer Payments Multiplier = MPC X Multiplier
OR
Transfer Payments Multiplier = MPC/MPS.
6. Tax Multiplier = -MPC X Multiplier
OR
Tax Multiplier = -MPC/MPS.
a.
What happens when people get a tax cut?
Their DI increases!
a. What happens when people get a tax increase?
Their DI decreases!
b. What two things can you do with income?
Spend (Consume) it or save it!
c. If people save some of their tax cut the tax multiplier
will not be as great as the government purchases
multiplier. Conversely if their taxes are raised they will
consume less AND save less.
7. Balanced Budget Multiplier =
Government Purchases Multiplier + Tax Multiplier = 1
An increase in government spending (G) that is met
with an equal increase in taxes (T) in order to maintain a
balanced budget will boost the GDP by an equal amount.
Equal increases in G and T will expand GDP by an
amount equal to that increase.
8. Net Exports Multiplier = 1/ (MPS + MPM)
MPM = Marginal Propensity to iMport = ∆ Imports/ ∆GDP
As economy enters a recession Expansionary
Fiscal Policy (↑ G OR ↑ TP OR ↓ T)  ↑ AD
BUT...
↑ AD  ↑ D for Money (borrowing)  ↑ Domestic
Interest Rates  ↑ Foreign Demand for $ 
$ appreciates  NX ↓  AD ↓  contractionary offset
to the expansionary fiscal policy!
If economy has inflation  Contractionary Fiscal Policy
(↓ G OR ↓ TP OR ↑ T)  ↓ in AD
BUT...
↓ in AD  ↓ D for Money (borrowing)  ↓ Domestic
Interest Rates  ↓ Foreign Demand for $  $ depreciates
 NX ↑  AD ↑  expansionary offset to the
contractionary fiscal policy!
Calculate the marginal propensities to consume, save,
import, and the various multipliers (#1-8) using the
chart below.
Disposable
Income (DI)
2003
2004
1000
1200
800
920
Consumption (C)
Calculating the MPC and MPS
Disposable
Income (DI)
2003
2004
1000
1200
800
920
Consumption (C)
MPC = ∆C/ ∆DI
MPS = 1- MPC
120 ÷ 200 = .6
1- .6 = .4
Then answer these questions:
1. A $1,000,000 increase in autonomous expenditure
would increase GDP by how much? Show your work!
Multiplier = 1/ 1-MPC OR 1/ MPS
MPC =.6
MPS = .4
1÷ (1- .6) = 1 ÷ .4 = 2.5
$1,000,000 x 2.5 = $2,500,000
2. A $1,000,000 increase in government spending
would increase GDP by how much? Show your work!
Government Spending Multiplier is the same as
the Multiplier so it equals 2.5.
$1,000,000 x 2.5 = $2,500,000
3. A $1,000,000 increase in transfer payments would
increase GDP by how much? Show your work!
TP Multiplier = MPC x Multiplier
OR
TP Multiplier = MPC/ MPS
.6 x 2.5 = 1.5 OR .6 ÷ .4 = 1.5
$1,000,000 x 1.5 = $1,500,000
4. A $1,000,000 decrease in taxes would increase
GDP by how much? Show your work!
Tax Multiplier = -MPC x Multiplier
OR
Tax Multiplier = -MPC/ MPS
- .6 x 2.5 = -1.5 OR -.6 ÷ .4 = -1.5
$-1,000,000 x -1.5 = $1,500,000
5. A $1,000,000 increase in government spending
accompanied by a $1,000,000 increase in taxes would
increase GDP by how much? Show your work!
Balanced Budget Multiplier =
Government Purchases Multiplier + Tax Multiplier
2.5 + (-1.5) = 1.0
$1,000,000 x 1 = $1,000,000
6. A $1,000,000 increase in government spending
would increase GDP by how much if the marginal
propensity to import were .1 ? Show your work!
Net Exports Multiplier = 1 ÷ (MPS + MPM)
MPM = .1
MPS = .4
1 ÷ (.4 + .1) = 2.0
$1,000,000 x 2.0 = $2,000,000