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Objectives: 1. Analyze data and use graphing to interpret and identify APC/APS and MPC/MPS 2. Explain the relationship between MPC and MPS (always=1) 3. Explain the difference between APC/APS and MPC/MPS 4. Calculate MPS and MPC using economic data using correct formula. 5. Learn the Multiplier Effect and use the formula to predict max impact on economy. FMA Suppose the United States has an economy of 15 Trillion dollars. The slope of the consumption line is .95. If investment spending dropped by 100 billion dollars, then what will be the new level of real GDP? 1 FMA Suppose the United States has an economy of 15 Trillion dollars. The slope of the consumption line is .95. If investment spending dropped by 100 billion dollars, then what will be the new level of real GDP? Step 1: If the slope of the consumption line is .95 then MPC =.95 Step 2: Calculate MPS. MPS= 1-MPC= 1-.95=.05 Step 3: Use the Multiplier effect to determine effect on MPC Income Expenditure Multiplier = 1 1-MPC = 1 MPS = 1/.05=20 Step 4: Use the multiplier * the decrease in spending 20*$100B=$2Trillion Step 5: Subtract the lost economic activity from the original GDP to get the answer. New GDP=Old GDP-Multiplier Amount=15Trillion-$2 Trillion=$13 trillion 2 http://www.cnn.com/video/ 30 years of Deficit Debate Video 3 http://espanol.video.yahoo.com/watch/7384251/19311491 4 See why Obama may be unwilling to "slash and burn" Spending reductions in economy have a 20 fold impact on the economy. From the News: 5 Activities: 1. FMA/Attendance/ FMA Discussion/ 2. Obama's Budget "cut"-Video 3. Discuss Activity Two Answers and Questions 4. Notes: Keynes and a new Economic Model 6 Activity 2: Answers and Discussion 7 8 9 10 Questions???? 11 Attachments Obama's Budget "Cut" CLassical v Keynesian Economics.ppt