We will start at $500 equilibrium GDP on each. Of the three items (equilibrium GDP, change

1. We will start at $500 equilibrium GDPstart at $500 equilibrium GDP on each.

2. Of the three itemsthree items (equilibrium GDP, change in expenditures, and MPC), you will be givengiven twotwo and if you know two you can always figurefigure out the 3out the 3rdrd. For instance if you knew that equilibrium GDP increased by $400 and the multiplier was 4, then the change in expenditures was obviously $100.

3. Except for 6, 9, 15, & 186, 9, 15, & 18, you will increase increase equilibrium GDPequilibrium GDP above $500above $500, because there is an increase in G, or a decrease in T, orincrease in G, or a decrease in T, or an equal increase in G&T.an equal increase in G&T. Ex: With MPC of .75 & therefore a Ex: With MPC of .75 & therefore a MME of 4, E of 4, an increase in G of $20 means $20 x 4 = $580an increase in G of $20 means $20 x 4 = $5804. On questions 6, 9, 15, & 186, 9, 15, & 18, you will decrease equilibriumdecrease equilibrium GDP below $500GDP below $500 because you are either decreasing G, decreasing G, increasing T, or there is an equal decrease in G & T.increasing T, or there is an equal decrease in G & T. Ex: With MPC of .75 & therefore a Ex: With MPC of .75 & therefore a MME of 4, a decreaseE of 4, a decrease in G of $20 means -$20 x 4 = $420.in G of $20 means -$20 x 4 = $420.

INSTRUCTIONS FOR THE NEXT FOUR AE SLIDESINSTRUCTIONS FOR THE NEXT FOUR AE SLIDES

AE

E1E1

E3E3

E2E2AE2AE2

AE1AE1

AE3AE3

500500RRecessionaryecessionary spending gap spending gap

Inflationary spending gapInflationary spending gap

RRecessionaryecessionary

GDP gapGDP gap

IInflationarynflationary

GDP gapGDP gap

$10$10MMEE____MMTT______MMBBBB______

$$100100 Y Y with with MMEE

___Y with ___Y with MMTT

___Y with___Y with MMBBBB

1190901010

.9.9??

1010

11 99

$$200200 Y with Y with MMEE

_____Y with _____Y with MMTT

_____Y with_____Y with MMBBBB

1501505050

____ Y with ____ Y with MMEE

____Y with ____Y with MMTT

____Y with____Y with MMBBBB

___ Y with ___ Y with MMEE


____Y with____Y with MMBBBB

121248486060

$12$12 $50$50

$20$20Change in Change in ExpendituresExpenditures

MPCMPC[So MPS &[So MPS &MMEE, , MMTT, , & & MMBBBB]]

Chg inChg inEquilibriumEquilibrium GDP GDP

The Multiplier & Equilibrium GDPThe Multiplier & Equilibrium GDP

[Give the correct equilibrium GDP [start from $500$500] using the MMEE, MMTT, MMBBBB]

45°45°

$500$500

AE1AE1AE2AE2AE3AE3

EE22

EE11

EE33

RecessionaryRecessionarySpending gapSpending gap

InflationaryInflationarySpending gapSpending gap

AEAE

MMEE=1/MPS =1/MPS [chg in G, Xg, or Xn][chg in G, Xg, or Xn] MMBBBB = 1 [G&T ] = 1 [G&T ]

MMEE____MMTT______MMBBBB______



.75.75.80.80

.50.50

1133

44

11

5544

22

1111

MMTT = MPC/MPS = MPC/MPS [Chg in T ] [Chg in T ]

[+G][+G] 1. 1. MMEE = ____ = ____[-T][-T] 2. 2. MMTT = ____ = ____[+G&T[+G&T] 3. ] 3. MMBBBB =____ =____

[+G][+G] 1. 1. MMEE = ____ = ____[-T][-T] 2. 2. MMTT = ____ = ____[+G&T][+G&T] 3. 3. MMBBBB =____ =____



MMEE’s’s[G,Ig,Xn][G,Ig,Xn]MPC MMPC M.90 = 10.90 = 10.87.5= 8.87.5= 8.80 = 5.80 = 5.75 = 4.75 = 4.60 =2.5.60 =2.5.50 = 2.50 = 2

540540520520520520

4040

20202020

MMTT’s’sMPC MMPC M.90 = 9.90 = 9.87.5= 7.87.5= 7.80 = 4.80 = 4.75 = 3.75 = 3.60 =1.5.60 =1.5.50 = 1.50 = 1

700700650650550550512512

548548560560 600600

510510590590

SS

3322







[[-G-G] 1. ] 1. MMEE = =______[[+T+T] 2. ] 2. MMTT = =______[[-G&T-G&T]3.]3.MMBBBB==______

2.52.51.51.5

11

505030302020

221111

50505050

8877

11

554411

757560601515

4433

11

300300100100

10109911

-200-200

300300

-180-180

320320

-20-20

480480

$100$100

$50$50

[[-G-G] 1. ] 1. MMEE = = ___ ___[[+T+T] 2. ] 2. MMTT = =______[[-G&T-G&T]3.]3.MMBBBB==______





550550530530520520

600600550550550550

460460

495495465465

575575560560515515

900900800800600600



____Y with ____Y with MMBBBB













-40-40-35-35-5-5

100100

$15$15 -$20-$20

-$5-$5$20$20

400400___ Y with ___ Y with MMEE



44 55 66

77 88 99

.60.60 .50.50 87.587.5

.80.80 .75.75 .9.9







[[-G-G] 1. ] 1. MMEE = =______[[+T+T] 2. ] 2. MMTT = =______[[-G&T-G&T]3.]3.MMBBBB==______

2.52.51.51.5

11

12512575755050

20201919

11

383822

5544

11

443311

606045451515

2211

11

100100100100

887711

-80-80

420420

-70-70

430430

-10-10

490490

$100$100

$2$2

[+G][+G] 1.1. MMEE = ___= ___[-T][-T] 2.2. MMTT =___=___[+G&T][+G&T]3.3.MMBBBB=___=___





512.5512.5507.5507.5

505505

540540538538502502

550550

510510540540

560560545545515515

700700600600600600




505040401010

4040

$15$15 -$10-$10

$10$10$5$5

200200

1010 1111 1212

1313 1414 1515

__._ Y with __._ Y with MMEE

_.___Y with _.___Y with MMTT

__ with __ with MMBBBB

.60.60 .95.95 ????







.75.75 .50.50 87.587.5










5544

11

443311

101099

11$8$8

[[-G-G] 1. ] 1. MMEE = = ___ ___[[+T+T] 2. ] 2. MMTT = =______[[-G&T-G&T]3.]3.MMBBBB==______



625625600600525525

532532524524508508

400400

490490410410




-$10-$10$25$25

1616 1717 1818

.80.80 .75.75 .9.9






____Y with ____Y with MMBBBB2525100100125125 3232

242488

-100-100-90-90-10-10

MMTT

44

33

1.51.5

11

99

The The 2000 Olympics2000 Olympics resulted in resulted in $3 1/2 billion$3 1/2 billion to Australia’s economy over a year’s time.to Australia’s economy over a year’s time.The The Texas-Oklahoma gameTexas-Oklahoma game brings brings $21 mil$21 mil to D-FW. to D-FW.2006 Cotton Bowl2006 Cotton Bowl brought brought $30 million$30 million to D-FW. to D-FW.Super BowlSuper Bowl brought brought $336 million$336 million to Houston. to Houston.Fiesta BowlFiesta Bowl for national title brought in for national title brought in $85 million$85 million..Big 12 TournamentBig 12 Tournament brought brought $45 million$45 million to D-FW to D-FW

OUOU

MMTT = MPC/MPS= MPC/MPSMMEE = 1/MPS = 1/MPS

MPCMPC MMEE

.9.9 1010

.8.8 55

.75.75 44

.60.60 2.52.5

.5.5 22

The larger the MPClarger the MPC, the smaller the MPSsmaller the MPS, and the greater the multipliergreater the multiplier. This is the “simple multiplier”“simple multiplier”because it is based on a “simple model “simple model of theof the economy” economy”.

NNotice the otice the 22ndnd round round

with with .9.9 versusversus .5.5

9090%%

5050%%

22ndnd Round at .9 Round at .9

22ndnd Round at .5 Round at .5

If If ArlingtonArlington gets a gets a Super BowlSuper Bowl, it would have an, it would have anestimated economic impact of estimated economic impact of $400 million$400 million..

200,000 people200,000 people would visit the area. would visit the area.

Super BowlSuper Bowl - $336 Million For Houston in 2004 - $336 Million For Houston in 2004

• $150 - Parking rates around the stadium

• $500-$600 per Super Bowl ticket

[$2,000-$6,000 on E-Bay for a seat]• $12,000 – cost of Super Bowl trophy

• $2.3 million – 30 second ad• $50,000 – Super Bowl Ring• 68,00068,000 to each player on the winning twinning teameam

• $36,500$36,500 to each player on the losing losing teamteam. • $3.35 million$3.35 million to the winning teamwinning team• $2.59 million$2.59 million to the losing teamlosing team• Hotels - $69 M; bars & restaurants-$27 M; entertainment-$15 M;

transportation-$15 M; and retail sales-$41 M

Reliant Stadium

$1,000.00$1,000.00 500.00500.00 250.00250.00 125.00125.00 62.5062.50 31.2531.25 15.62515.625 7.81257.8125 3.906253.90625 1.9531251.953125 .9765625.9765625 .48828125.48828125 .244140625.244140625 .1220703125.1220703125 .06103515625.06103515625 .030517578125.030517578125 .015258789062.015258789062

$2,000,000,000$2,000,000,000

Step by Step Working of Step by Step Working of “Multiplier”“Multiplier” [MPC is .5] [MPC is .5]

[[Increased by aIncreased by a multiple multiple of of 2]2]

““What A Girl What A Girl Wants.”Wants.”

GovernmentGovernment increases spending increases spending byby $1 billion$1 billion with a with a multipliermultiplier of of 22

On new highwaysOn new highwaysHighway workers buy new boatsHighway workers buy new boatsBoat builders buy plasma TVsBoat builders buy plasma TVsTV factory workers buy new carsTV factory workers buy new carsAuto workers buy “wife beater shirts”Auto workers buy “wife beater shirts”Apparel workers spend $ on moviesApparel workers spend $ on moviesMovie Movie moguls spend money onmoguls spend money on Christina Christina Agulera songs.Agulera songs.

LLet’s et’s GGo o TTo o Padre Island Padre Island and and Party Party With TheWith The MultiplierMultiplier

• During spring break, college students like to head to During spring break, college students like to head to Padre IslandPadre Island. . The The “multiplier”“multiplier” is getting ready to work. is getting ready to work.

• With dollars in their pockets, the students spend money on food and With dollars in their pockets, the students spend money on food and drink, motel rooms, dance clubs, etc. These dollars raise total income drink, motel rooms, dance clubs, etc. These dollars raise total income there by some there by some multiple of itselfmultiple of itself..

• College students buy pizzas, beer, and sodas. The people who sell College students buy pizzas, beer, and sodas. The people who sell these items findthese items find their incomes rising. They spend some fraction their incomes rising. They spend some fraction of their increased income, which of their increased income, which generates additional income for generates additional income for others. others.

• If the students spend If the students spend $8 million$8 million at Padre and the MPC is .60, then at Padre and the MPC is .60, then college students will increase income in Padre by college students will increase income in Padre by $20 $20 millionmillion. .

• When the networks show scenes on the beach, the average person When the networks show scenes on the beach, the average person simply sees college students having a good time.simply sees college students having a good time.

• But – economists see the But – economists see the multiplier at workmultiplier at work, generating higher levels , generating higher levels of income for many of the residents of Padre Island.of income for many of the residents of Padre Island.

UT studentUT student

These areThese areTexas ATexas A&&M M

studentsstudentsat Padre.at Padre.

Multiplier – As the money goes from Multiplier – As the money goes from one person, to another, to another…one person, to another, to another…

NS 7 – 10NS 7 – 107. The APCAPC indicates the percent of total income that will be (consumed/saved). 8. The MPCMPC is the fraction of a change in income which is (spent/saved).9. The greater is the MPCgreater is the MPC, the (larger/smaller) the MPSMPS, and the (larger/smaller) the multipliermultiplier.10. With a MPS of .4MPS of .4, the MPCMPC will be (.4/.2/.6) and the multipliermultiplier will be (2/2.5/4).

[C+Ig][C+Ig] ((private-closedprivate-closed))

[C+Ig+[C+Ig+XnXn]] ((privateprivate--openopen))

[C[C++IgIg++GG++XnXn]] ((mixedmixed--openopen))

““MMEE” = ” = 44

ClosedClosedPrivatePrivate

PrivatePrivate

MixedMixed OpenOpen

OpenOpen

390390 470470 550550 Real GDP00

AE3AE3 (C+Ig(C+Ig+G+G+Xn) (+Xn) (Complex EconomyComplex Economy) [) [Mixed-openMixed-open]]

AE1AE1(C+Ig)[(C+Ig)[BBasic asic EEconomyconomy][][PPrivaterivate(no(no G)-G)-CCloselosedd(no(no X or M)]X or M)]

CConsumptiononsumption

+80+80 +80+80CC=390=390

((AEAE11)470)470((AEAE22)550)550

((AEAE33)630)630+20 G+20 G

+20 Ig+20 Ig

SS

InjectionsInjections LeakagesLeakages1. 1. IInvestment nvestment [20]=[20]= 1. Saving[20]1. Saving[20]2. Exports [10]=2. Exports [10]= 2. I2. Imports[10]mports[10]3. G3. Government overnment [20]=[20]= 3. Taxes 3. Taxes [20][20]

Notice that the injections areinjections are autonomous (independent) of Y

[From [From “Simple”“Simple” to to “Complex”“Complex” economy] economy]Building AE 1Building AE 1

AE2 (C+Ig+AE2 (C+Ig+XnXn) () (Private-openPrivate-open)) [[X(10)-M(10)X(10)-M(10)]]

4545

+ Xn+ Xn

Con

su

mp

tion

Con

su

mp

tion

oo

ConsumptionConsumption

CC11

FF

SAVINGSAVING

EE

CC22

SS

How to figure the MPC & MPSHow to figure the MPC & MPS [MPC = C/ Y][MPC = C/ Y] [MPS = S/ Y][MPS = S/ Y]

Disposable IncomeDisposable Income

BB

CC

DD

AA

HH

DissavingDissaving

MPC=?MPC=?BC/EFBC/EF[or [or ABAB]]

MPS=?MPS=?CD/EFCD/EF

4545

SS

200200 400400 1,0001,000 bil. bil. 0 0 N N QQ KK

$1,000$1,000$700$700$400$400 JJ

PP

II

HHAEAE11[C+Ig][C+Ig]

ConsumptionConsumption

Real GDP

AE

AE

[C+

Ig]

[C+

Ig]

With IgWith Ig [C+Ig][C+Ig],, the MPC is?the MPC is? PIPI//QQKK

The MPS is ?The MPS is ? HHII//QQKK

What income level represents “dissaving”?What income level represents “dissaving”? $200$200

Consumption will be equal to income at income level ?Consumption will be equal to income at income level ? $400$400

4545oo$100$100

11. The APCAPC is one is one at letter (A/B/C/D).12. The MPCMPC is equal to (AE/OE or BC/EF[or AB]). [moving from OE(400) to OF(1,000)]13. At income level “OF”“OF” the volume of savingsaving is (CB/CD).14. Consumption will be equal toConsumption will be equal to incomeincome at income level (OH/OE).

15. The economy is dissavingdissaving at income level (OH/OF).16. The MPSMPS is (CD/EF or CB/EF).

[moving from OE to OF]

CC

Con

su

mp

tion

Income

00H EH E FF

AA BBCC

DD

200 400 1,000200 400 1,000

700700

400400

1,0001,000

45o

YYRR F*F* 500 500 580580

An Increase in G of $20B is more expansionary than aAn Increase in G of $20B is more expansionary than a decrease in T of $20 Bdecrease in T of $20 B

[If the MPC is .75,[If the MPC is .75, MME is 4E is 4 but thebut the MMT is only 3T is only 3]]

AEAE

AEAE

+80+80

YYRR Y*Y*500500 580580

+60+60+20T+20T

AE1(C+Ig)AE1(C+Ig)AEAE22(C+Ig+G)(C+Ig+G)

AEAE11

AEAE22

Incr G spending by $20 bil.Incr G spending by $20 bil.““MMEE” of 4 [1/.25]” of 4 [1/.25]

[20 x 4 = $80][20 x 4 = $80]

““Tax cut” of $20 billionTax cut” of $20 billion““MMTT” = 3 [.75/.25] x 20 = $60” = 3 [.75/.25] x 20 = $60

[Need a 25% larger “Tax cut” to get to $580][Need a 25% larger “Tax cut” to get to $580]““Tax cut of $25.67 billion x 3 = $80]Tax cut of $25.67 billion x 3 = $80]

Let’s see, anyone’s spending Let’s see, anyone’s spending (G,Ig, or Xn) becomes someone (G,Ig, or Xn) becomes someone else’s income, so there will be else’s income, so there will be an increase in “C”.an increase in “C”.

+20G+20G

SS

SS

560560

““Big 12” Tournament brings $45Big 12” Tournament brings $45million to the DFW economy.million to the DFW economy.

AACAAC

C C = = YYDD

1996

1999

U.S. U.S. ConsumptionConsumption and and IncomeIncome

DISPOSABLE INCOME (billions of dollars per DISPOSABLE INCOME (billions of dollars per year)year)

$1000 2000 3000 4000

Actual consumer spendingActual consumer spending

6000

5000

4000

3000

2000

1000

0 5000 6000 7000

45°

$7000

19801981198219831984198519861987198819891990199119921993199419951997

1998

2000

CO

NSU

MPT

ION

(bill

ions

of d

olla

rs p

er y

ear)

[so, gives us APC][so, gives us APC]

The Consumption Function:The Consumption Function: How large How large wewe expect the basic flow of consumer spending expect the basic flow of consumer spending to be at different levels of GDP (income) to be at different levels of GDP (income)

19291929 – S – Savingaving = $ = $44 bil. bil.

1933 – Dissaving1933 – Dissaving

1944 – S1944 – Savingaving = = 2020%%

Dissaving During The Great Dissaving During The Great DepressionDepression

““C” = $4,425C” = $4,425““S” = $375S” = $375

C/Y = $4,425/$4,800 = 92%C/Y = $4,425/$4,800 = 92%1993 Saving= $375.0 billion

Con

su

mp

tion

Con

su

mp

tion

(b

illion

s o

f d

ollars

)

o45

o


Disposable Income (billions of dollars)370 390390 410 430 450 470 490 510 530 550

$530

510

490

470

450

430

410

390390

370

S

Consumption ScheduleConsumption Schedule [[directdirect relationship between relationship between incomeincome & & consumptionconsumption]]

SS

ConsumptionConsumption//SavingSaving Schedules Schedules

MPCMPC and and MPSMPS

EEquilibriumquilibrium in ain a P Private-rivate-CClosed losed [[CC++IgIg] ] EEconomyconomy

LeakageLeakage (S of $20 B) (S of $20 B) = = InjectionInjection (Ig of $20 B) (Ig of $20 B)

AE

AE

[[ CC ++

IgIg

]] (b

illion

s o

f d

ollars

)

o45

o


C + IC + Igg

IIg g = $20 = $20 BillionBillion

EquilibriumEquilibrium

Real domestic product, GDP (billions of dollars)370 390390 410 430 450 470470 490 510 530 550

Equilibrium GDP Equilibrium GDP afterafter $20 bil. Ig [MPC=.75] $20 bil. Ig [MPC=.75]AE[C+Ig]AE[C+Ig] [“Basic” or “Simple” economy][“Basic” or “Simple” economy]

C =$450 BillionC =$450 Billion

$530

510

490

470470

450

430

410

390390

370 + 20 Ig

+ 20 Ig

+80+80

SS

PrivatePrivate ClosedClosed

AAt t EEquilibriumquilibrium, A, Any ny InjectionsInjections = A = Any ny LeakagesLeakages

InjectionsInjections = = LeakagesLeakagesC+Ig Ig(20)Ig(20) = S(20)S(20)

[Private-closed]

C+Ig+Xn Ig(20)+X(10)Ig(20)+X(10) = S(20)+ M(10)S(20)+ M(10) [Private-open]

C+Ig+G+Xn IIgg(20)(20)++GG(20)(20)++XX(10)(10) = SS(20)(20)++TT(20)(20)++MM(10)(10)

[Mixed-open]

AutonomousAutonomous v.v. Induced Induced InvestmentInvestment

Autonomous InvestmentAutonomous Investment““Independent of” or “not stimulated by Y”Independent of” or “not stimulated by Y”

Investment induced by incomeInvestment induced by income(dependent” or “stimulated by Y”(dependent” or “stimulated by Y”

SSo o Ig Ig is said to beis said to be “forward looking”,“forward looking”, based more on profit expectations,based more on profit expectations,rather than current income. rather than current income.

Volatility of Volatility of InvestmentInvestment

R R R R R R R R R R R R R R

•Durability of Capital Durability of Capital [can postpone][can postpone]

•Variability of ProfitsVariability of Profits

•Variability of ExpectationsVariability of Expectations

•Irregularity of InnovationIrregularity of Innovation [introduction of new products][introduction of new products]

Reasons for Instability of Reasons for Instability of InvestmentInvestment

Pri

ce L

evel

Pri

ce L

evel

ASAS

ADAD22

Inflation and the Multiplier [4]Inflation and the Multiplier [4]

GDPGDP11 GDPGDP22

PP11

ADAD11

ADAD33

GDPGDP33

PP22

Full Multiplier Full Multiplier EffectEffect ReducedReduced

MultiplierMultiplierEffect DueEffect Dueto Inflationto Inflation

+20+20

+ 80 bil.+ 80 bil.

+20+20

+ 40 + 40 bil.bil.

M(4)=chg.Y/chg.EM(4)=chg.Y/chg.E [80] [20][80] [20]

M(2)=chg.Y/chg. EM(2)=chg.Y/chg. E [40] [20][40] [20]

PLPL11

Pri

ce level

Pri

ce level

Real GDP (billions)Real GDP (billions)

Full $25 billionFull $25 billionincrease in ADincrease in AD

ADAD11 ADAD22

$5 billion initial direct increase in spending$5 billion initial direct increase in spending

[MPS=.20MPS=.20] the multiplier at work...the multiplier at work...

$475$475 500500

+5+5

ASAS

Pri

ce level

Pri

ce level

Real GDP (billions)Real GDP (billions)

ADAD11

ADAD22

$5 billion initial direct increase in spending$5 billion initial direct increase in spending

PLPL11

$500$500 525525

+5+5

ASAS

520520

PLPL22

$25 billion$25 billion$20 billion$20 billion M = 5M = 5

25/5=525/5=5

M = 4M = 420/5=420/5=4

ReducedReducedMultiplierMultiplierEffect DueEffect Dueto Inflationto Inflation

ADAD22

Documents

We will start at $500 equilibrium GDP on each. Of the three items (equilibrium GDP, change