The paper "Introductory Macroeconomics" is a great example of an assignment on macro and microeconomics. The multiplier refers to the ratio of a change in national income to the initial change in autonomous expenditure that brought it about. It is therefore a measure of the effect on total national income of a unit change in a component of aggregate demand such as investment, government expenditure, or export (Rittenberg & Tregarthen 2008). It can be expressed as follows: Multiplier = Total change in national income The initial change in national income The term national income multiplier is a general term that covers the multiplier effects arising from any changes in the components of aggregate demand.
For example, it is possible to have the following multiplier: Government expenditure multiplier = Eventual change in national income The initial change in government spending The size of the multiplier is found by: - 1 1-marginal propensity to consume Or 1 Marginal propensity to save Marginal propensity to consume (MPC) + marginal propensity to save (MPS) =1, therefore, MPS=1-MPC (a)In our case when the MPC is 0.6 the value of the multiplier can be obtained by: - 1/ (1-0.6) =2.5 This implies that out of any addition to government income 60% is spent and 40% is saved.
If the government increases spending by $20 billion dollars, $ 12 billion would be spent on consumption while $8 billion would be saved. (b) The new equilibrium value of real GDP corresponding to the $20 billion dollar increase in government spending will be $850 billion. This is obtained by the consumption amount of $20, which will increase GDP by 2.5 times, this will give us an increase of 20*2.5=50. Therefore, the new equilibrium GDP will be $800+$50=$850. (c) If the MPC is 0.8 then the value of the multiplier can be obtained by: - 1/ (1-0.8) =5 This implies that out of any addition to government income, 80% is consumed and 20% is saved.
If the government spending is increased by $20 billion dollars, $16 billion dollars would be spent on consumption, and $4 billion dollars would be saved. (d) The new equilibrium value of real GDP corresponding to the $20 billion dollar increase in government spending will be $900 billion dollars. The investment amount of 20, will increase GDP by 5 times, this will give us an increase of 20 X 5 = 100.
Therefore, the new equilibrium GDP will be $800 + $100 = $900.
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