UVA ECON 2020 - 10-12-2012Handout (6 pages)

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10-12-2012Handout



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10-12-2012Handout

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Pages:
6
School:
University Of Virginia
Course:
Econ 2020 - Principles of Economics: Macroeconomics

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Components of the Multiplier Model Applications Multiplier Model Elias Yannopoulos October 12 2012 Elias Yannopoulos Multiplier Model Components of the Multiplier Model Applications Aggregate Expenditure Aggregate Production the total amount of final goods and services produced in an economy Remember Production creates and equal amount of income Aggregate production income curve demonstrates this relationship Ex graph Aggregate Expenditures the total amount of spending on final goods and services in the economy There are fours classifications of aggregate expenditures and they may look familiar Consumption Investment Government and Net Exports There are two types of expenditures Autonomous expenditures expenditures that do not systematically vary with income Induced expenditures expenditures that vary with income Elias Yannopoulos Multiplier Model Components of the Multiplier Model Applications Expenditure Function Aggregate expenditure AE curve graphical representation of the relationship between income and aggregate expenditure Ex graph The slope of the AE curve is equal to the marginal propensity to expend Marginal propensity to expend mpe the ratio of the change in aggregate expenditures to a change in income By assumption 0 mpe 1 Compare with marginal propensity to consume mpc Aggregate expenditure function the mathematical relationship between income and expenditure AE AE0 mpe Y autonomous expenditures induced expenditures Elias Yannopoulos Multiplier Model Components of the Multiplier Model Applications Shifts in the Expenditure Function Shifts in autonomous expenditures the primary shift for this model Changes to autonomous expenditures cause parallel shifts in the AE curve Autonomous expenditure AE curve Autonomous expenditure AE curve The second possible shift to the AE curve is changes in mpe A change in mpe changes the slope of the AE curve mpe slope of AE curve becomes steeper mpe slope of AE curve becomes shallower Elias Yannopoulos Multiplier Model



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