1.
INSTRUCTIONS FOR THE NEXT FOUR AE SLIDES
We will start at $500 equilibrium GDP on each.
Inflationary spending gap
2. Of the three items (equilibrium GDP, change
in expenditures, and MPC), you will be given
two and if you know two you can always figure
out the 3rd. For instance if you knew that
equilibrium GDP increased by $400 and the
multiplier was 4, then the change in expenditures
was obviously $100.
AE2
AE
Recessionary spending gap
E2
AE1
E1
AE3
E3
500
Recessionary Inflationary
GDP gap
GDP gap
3. Except for 6, 9, 15, & 18, you will increase
equilibrium GDP above $500, because there
is an increase in G, or a decrease in T, or
an equal increase in G&T.
Ex: With MPC of .75 & therefore a ME of 4,
an increase in G of $20 means $20 x 4 = $580
4. On questions 6, 9, 15, & 18, you will decrease equilibrium
GDP below $500 because you are either decreasing G,
increasing T, or there is an equal decrease in G & T.
Ex: With MPC of .75 & therefore a ME of 4, a decrease
in G of $20 means -$20 x 4 = $420.
The Multiplier & Equilibrium GDP
[Give the correct equilibrium GDP [start from $500] using the ME, MT, MBB]
MT = MPC/MPS [Chg in T ] MBB = 1 [G&T ]
ME=1/MPS [chg in G, Xg, or Xn]
Inflationary
Spending gap
AE
E2
E1
Chg in
Equilibrium GDP
MPC
[So MPS &
ME, MT, & MBB]
Change in
Expenditures
[+G] 1. ME = ____
560
[-T]
2. MT = ____
548
[+G&T] 3. MBB =____
512
1
60 Y with ME
____
48
____Y with MT
12
____Y with MBB
$12
.80
ME__
5
4
MT___
MBB1
___
ME’s
[G,Ig,Xn]
MPC M
.90 = 10
.87.5= 8
.80 = 5
.75 = 4
.60 =2.5
.50 = 2
540
[+G] 1. ME = ____
S
[-T]
2. MT = ____
520
AE1
520
AE2 [+G&T] 3. MBB =____
AE3
E3
40
___ Y with ME
20 with MT
____Y
20 with MBB
____Y
45°
Recessionary $500
Spending gap
700
[+G] 1. ME = ____
[-T]
2. MT = ____
650
[+G&T] 3. MBB =____
550
2
$200 Y with ME
150
_____Y with MT
50 with MBB
_____Y
$50
.75
4
ME__
3
MT___
1
MBB___
2
ME__
1
MT___
MBB___
1
$20
.50
MT’s
MPC M
.90 = 9
.87.5= 7
.80 = 4
.75 = 3
.60 =1.5
.50 = 1
[+G] 1. ME = ____
600
[-T]
2. MT = ____
590
510
[+G&T] 3. MBB =____
3
$100 Y with ME
90
___Y with MT
10 with MBB
___Y
$10
__
.9 ME10
9
?
MT___
1
MBB___
[+G] 1. ME = ____
550
[-T]
2. MT = ____
530
[+G&T] 3. MBB =____
520
4
___ Y with ME
50
____Y
30 with MT
____Y
20 with MBB
[+G] 1. ME = ____
600
[-T]
2. MT = 550
____
[+G&T] 3. MBB =____
550
5
100
___ Y with ME
50 with MT
____Y
____Y with MBB
50
.60
$20
2.5
ME__
1.5
MT___
1
MBB___
[+G] 1. ME = ____
575
[-T]
2. MT = ____
560
[+G&T] 3. MBB =____
515
7
___
75 Y with ME
____Y
60 with MT
15 with MBB
____Y
$15
6
-40
___ Y with ME
-35
____Y with MT
____Y
-5 with MBB
.50
$50
[+G] 1. ME = ____
900
[-T]
2. MT = 800
____
[+G&T] 3. MBB =____
600
8
87.5
ME__
2
MT___
1
MBB___
1
___
400 Y with ME
____Y with MT
300
____Y with MBB
100
.80
ME__
5
MT___
4
MBB___
1
[-G] 1. ME = 460
___
465
[+T] 2. MT =___
[-G&T]3.MBB=___
495
-$5
[-G] 1. ME =___
300
[+T] 2. MT =___
320
[-G&T]3.MBB=___
480
9
-200
___ Y with ME
____Y with MT
-180
____Y with MBB
-20
.9
.75
$100
ME__
4
MT___
3
1
MBB___
ME__
8
7
MT___
MBB___
1
-$20
ME__
10
MT___
9
MBB___
1
[+G] 1. ME =512.5
____
[-T]
2. MT =507.5
____
[+G&T] 3. MBB =____
505
10
__._ Y with ME
125
_.___Y
with MT
75
__
50 with MBB
.60
ME__
2.5
MT___
1.5
1
MBB___
$5
[+G] 1. ME = ____
560
[-T]
2. MT = ____
545
[+G&T] 3. MBB =____
515
13 ___
60 Y with ME
____Y
45 with MT
15 with MBB
____Y
[+G] 1. ME = ____
540
[-T]
2. MT = 538
____
[+G&T] 3. MBB =____
502
11
40 Y with ME
___
38 with MT
____Y
____Y
with MBB
2
?
$2
$15
ME__
4
MT___
3
MBB___
1
ME__
20
19
MT___
1
MBB___
___
200 Y with ME
____Y with MT
100
____Y with MBB
100
.75
.50
$100
12
50 Y with ME
___
40 with MT
____Y
____Y
10 with MBB
.95
[+G] 1. ME = ____
700
[-T]
2. MT = 600
____
[+G&T] 3. MBB =____
600
14
[+G] 1. ME = 550
___
540
[-T]
2. MT =___
[+G&T]3.MBB=___
510
ME__
2
MT___
1
1
MBB___
?
$10
ME__
5
4
MT___
MBB___
1
[-G] 1. ME =___
420
[+T] 2. MT =___
430
[-G&T]3.MBB=___
490
15
-80 Y with ME
___
____Y with MT
-70
____Y with MBB
-10
87.5
ME__
8
7
-$10 MT___
MBB___
1
[+G] 1. ME = ____
625
[-T]
2. MT = ____
600
[+G&T] 3. MBB =____
525
16 125
___ Y with ME
532
[+G] 1. ME = ____
[-T]
2. MT = 524
____
[+G&T] 3. MBB =____
508
17
100
____Y with MT
25 with MBB
____Y
$25
18 -100
___ Y with ME
____Y with MT
-90
____Y with MBB
-10
.75
.80
ME__
5
MT___
4
1
MBB___
32 Y with ME
___
24 with MT
____Y
8 with MBB
____Y
[-G] 1. ME = ___
400
410
[+T] 2. MT =___
[-G&T]3.MBB=___
490
$8
4
ME__
3
MT___
1
MBB___
.9
-$10
ME10
__
9
MT___
1
MBB___
ME = 1/MPS
ME 2
MPC
.9 2 Round at .5 10 50%
nd
Round at .9
nd
.8
5
.75
43
.60 2.5 1.5
.5
2 1
4
MT = MPC/MPS
MT
90%
9
If Arlington gets a Super Bowl, it would have an
estimated economic impact of $400 million.
200,000 people would visit the area.
The 2000 Olympics resulted in $3 1/2 billion
to Australia’s economy over a year’s time.
The Texas-Oklahoma game brings $21 mil to D-FW.
2006 Cotton Bowl brought $30 million to D-FW.
Super Bowl brought $336 million to Houston.
Fiesta Bowl for national title brought in $85 million.
Big 12 Tournament brought $45 million to D-FW
Notice the 2nd round
The larger the MPC, the smaller the MPS, and the
with .9 versus .5 greater the multiplier. This is the “simple multiplier”
because it is based on a “simple model of the economy”.
OU
Super Bowl - $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
Reliant Stadium
• $2.3 million – 30 second ad
• $50,000 – Super Bowl Ring
• 68,000 to each player on the winning team
• $36,500 to each player on the losing team.
• $3.35 million to the winning team
• $2.59 million to the losing team
• Hotels - $69 M; bars & restaurants-$27 M; entertainment-$15 M;
transportation-$15 M; and retail sales-$41 M
Step by Step Working of “Multiplier” [MPC is .5]
Government increases spending by $1 billion with a multiplier of 2
$1,000.00 On new highways
500.00 Highway workers buy new boats
250.00 Boat builders buy plasma TVs
125.00 TV factory workers buy new cars
62.50 Auto workers buy “wife beater shirts”
31.25 Apparel workers spend $ on movies
15.625 Movie moguls spend money on Christina
7.8125 Agulera songs.
3.90625
1.953125
“What A Girl
.9765625
Wants.”
.48828125
.244140625
.1220703125
.06103515625
.030517578125
.015258789062
$2,000,000,000
[Increased by a multiple of 2]
Let’s Go To Padre Island and Party With The Multiplier
UT student
These are
Texas A&M
students
at Padre.
• During spring break, college students like to head to Padre Island.
•
•
•
•
•
The “multiplier” is getting ready to work.
With dollars in their pockets, the students spend money on food and
drink, motel rooms, dance clubs, etc. These dollars raise total income
there by some multiple of itself.
College students buy pizzas, beer, and sodas. The people who sell
these items find their incomes rising. They spend some fraction
of their increased income, which generates additional income for
others.
If the students spend $8 million at Padre and the MPC is .60, then
college students will increase income in Padre by $20 million.
When the networks show scenes on the beach, the average person
simply sees college students having a good time.
But – economists see the multiplier at work, generating higher levels
of income for many of the residents of Padre Island.
NS 7 – 10
7. The APC indicates the percent of total income
that will be (consumed/saved).
8. The MPC is the fraction of a change in income
which is (spent/saved).
9. The greater is the MPC, the (larger/smaller) the
MPS, and the (larger/smaller) the multiplier.
10. With a MPS of .4, the MPC will be (.4/.2/.6)
and the multiplier will be (2/2.5/4).
Multiplier – As the money goes from
one person, to another, to another…
Building AE 1
[From “Simple” to “Complex” economy]
[C+Ig]
Private
Closed
(private-closed)
[C+Ig+Xn] Private Open (private-open)
[C+Ig+G+Xn]
“ME” = 4
C=390
S
AE3 (C+Ig+G+Xn) (Complex Economy) [Mixed-open]
AE2 (C+Ig+Xn)
[X(10)-M(10)]
AE1(C+Ig)[B
asic(Private-open)
Economy][Private
(no G)-Closed(no X or M)]
(AE3)630
(AE21)550
)470
Mixed Open (mixed-open)
+20 G
Consumption
+20
Ig
+ Xn
+80 +80
45
0 390 470 550
Real GDP
Injections
Leakages
1. Investment [20]= 1. Saving[20]
Notice that the injections are
2. Exports
[10]= 2. Imports[10]
autonomous (independent) of Y
3. Government [20]= 3. Taxes [20]
How to figure the MPC & MPS
Consumption
[MPC =
C/ Y]
[MPS =
S
D
S/ Y]
SAVING
Consumption
C2
C
A
C1
Dissaving
o
MPC=? BC/EF[or AB]
B MPS=? CD/EF
45
H
E
F
Disposable Income
[C+Ig]
AE
S
$1,000
$700
$400
$100
H
I
J
AE1[C+Ig]
Consumption
P
o
45
200 400
0 N Q
1,000 bil.
Real
K
GDP
Consumption will be equal to income at income level ? $400
With Ig [C+Ig], the MPC is? PI/QK
The MPS is ? HI/QK
What income level represents “dissaving”?
$200
Consumption
D
1,000
700
A
400
C
B
o
45
0
200 400
1,000
F
H E
Income
C
11. The APC is one at letter
(A/B/C/D).
12. The MPC is equal to (AE/OE
or BC/EF[or AB]). [moving
from OE(400) to OF(1,000)]
13. At income level “OF” the
volume of saving is (CB/CD).
14. Consumption will be equal to
income at income level (OH/OE).
15. The economy is dissaving at
income level (OH/OF).
16. The MPS is (CD/EF or CB/EF).
[moving from OE to OF]
An Increase in G of $20B is more expansionary than a decrease in T of $20 B
[If the MPC is .75, ME is 4 but the MT is only 3]
S
AE2(C+Ig+G)
AE1(C+Ig)
AE
+80
YR
F*
500
580
Incr G spending by $20 bil.
“ME” of 4 [1/.25]
[20 x 4 = $80]
Let’s see, anyone’s spending
(G,Ig, or Xn) becomes someone
else’s income, so there will be
an increase in “C”.
S
AE
AE2
AE1
“Big 12” Tournament brings $45
million to the DFW economy.
AAC
“Tax cut” of $20 billion
“MT” = 3 [.75/.25] x 20 = $60
+60
YR 560 Y*
500
580
[Need a 25% larger “Tax cut” to get to $580]
“Tax cut of $25.67 billion x 3 = $80]
CONSUMPTION (billions of dollars per year)
U.S. Consumption and Income
$7000
2000
6000
5000
4000
3000
2000
1000
45°
0
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Actual consumer spending [so, gives us APC]
C = YD
$1000
2000
3000
4000
5000
6000
7000
DISPOSABLE INCOME (billions of dollars per year)
The Consumption Function: How large we
expect the basic flow of consumer spending
to be at different levels of GDP (income)
Dissaving During The Great Depression
C/Y = $4,425/$4,800 = 92%
1993 Saving
= $375.0 billion
“C” = $4,425
“S” = $375
1929 – Saving = $4 bil.
1933 – Dissaving
1944 – Saving = 20%
Consumption Schedule
Consumption
(billions of dollars)
[direct relationship between income & consumption]
S
S
$530
510
Consumption
490
470
450
430
410
390
370
45
o
o
370
390
410 430 450 470 490 510 530 550
Disposable Income (billions of dollars)
Consumption/Saving Schedules
MPC and MPS
Equilibrium in a Private-Closed [C+Ig] Economy
Leakage (S of $20 B) = Injection (Ig of $20 B)
Equilibrium GDP after $20 bil. Ig [MPC=.75]
AE[C+Ig] [“Basic” or “Simple” economy]
(billions of dollars)
S
$530
Private Closed
510
490
470
Consumption
Equilibrium
Ig = $20 Billion
450
430
AE[C + Ig]
C + Ig
410
C =$450 Billion
390
370
45
o
o
+80
470 490 510 530 550
Real domestic product, GDP (billions of dollars)
370 390 410 430 450
At Equilibrium, Any Injections = Any Leakages
Injections = Leakages
C+Ig
Ig(20)
=
S(20)
=
S(20)+ M(10)
[Private-closed]
C+Ig+Xn
Ig(20)+X(10)
[Private-open]
C+Ig+G+Xn Ig(20)+G(20)+X(10)
[Mixed-open]
= S(20)+T(20)+M(10)
Autonomous v. Induced Investment
So Ig is said to be “forward looking”,
based more on profit expectations,
rather than current income.
Investment induced by income
(dependent” or “stimulated by Y”
Autonomous Investment
“Independent of” or “not stimulated by Y”
Volatility of Investment
R
R
R
RR
R
R
Reasons for Instability of Investment
•Durability of Capital
[can postpone]
•Variability of Profits
•Variability of Expectations
•Irregularity of Innovation
[introduction of new products]
Inflation and the Multiplier [4]
Full Multiplier Effect
Price Level
AD1
AD2
AS
AD3
+20
+20
Reduced
Multiplier
Effect Due
to Inflation
P2
P1
+ 80 bil.
M(4)=chg.Y/chg.E
[80] [20]
GDP1
+ 40 bil.
GDP2
GDP3
M(2)=chg.Y/chg. E
[40] [20]
[MPS=.20] the multiplier at work...
$5 billion initial direct increase in spending
AS
AD1 AD
2
Full $25 billion
increase in AD
Price level
+5
PL1
$475
500
Real GDP (billions)
$5 billion initial direct increase in spending
Price level
AD1
AD2
+5
Reduced
AS Multiplier
Effect Due
to Inflation
M=4
20/5=4
PL2
PL1
$20 billion
$25 billion
520
$500
Real GDP (billions)
M=5
25/5=5
525