2/24/2017

The Spending Multiplier Effect 
An initial change in spending (C,I,G,Xn) cause larger change aggregate spending or Aggregate demand
Multiplier = Change in AD/ Change in Spending

Why does this happen?
expenditures and income flow continuously which sets off a spending increase in the economy

Calculating
Multiplier = 1/-MPC or 1/MPS

Multiplier are positive when there is an increase in spending and negative when there is a decrease.

Tax Multiplier ( it is always negative)
When the government taxes, multiplier works in reverse
WHY??? because how many is leaving the circular flow

= -MPC/1-MPC or -MPC/MPS
If there is a tax cut then the multiplier is because there is now more money in the circular flow

REASONS WHY PRICES TEND TO BE INFLEXIBLE OR "STICKY" IN A DOWNWARD DIRECTION. 
Due to menu cost
Fear of price wars
Wage Contracts
Min.Wage
Moral/ effect and productivity


Recession horizontal range - low output /GDP low / unemployment high
AS Intermediate range - upward sloping/ output expand / total spending expand
LR vertical range - firms cant not respond to increase in demand by increasing output FULL EMPLOYMENT