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CH24 2

This document discusses the Keynesian multiplier model. [1] It explains how shocks to investment, trade, and fiscal policy can affect output and employment through the multiplier process. [2] The multiplier model shows how consumption, investment, and other spending interact to determine aggregate demand and equilibrium output. [3] Fiscal policy multipliers are used to estimate the impact of changes in government spending and taxes on gross domestic product.

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Wilda Rahayu Hamzah
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29 views21 pages

CH24 2

This document discusses the Keynesian multiplier model. [1] It explains how shocks to investment, trade, and fiscal policy can affect output and employment through the multiplier process. [2] The multiplier model shows how consumption, investment, and other spending interact to determine aggregate demand and equilibrium output. [3] Fiscal policy multipliers are used to estimate the impact of changes in government spending and taxes on gross domestic product.

Uploaded by

Wilda Rahayu Hamzah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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CH.

24

THE MULTIPLIER
MODEL

1
THE BASIC MULTIPLIER MODEL
• Output Determination with Saving & Investment
• Output Determination by Consumption &
Investment
• The Multiplier
• The Multiplier Model in Perspective
FISCAL POLICY IN THE MULTIPLIER MODEL
• How Government Fiscal Policies Affect Output
• Fiscal-Policy Multipliers
• Multiplier in Action

2
BASIC MULTIPLIER MODEL
The Multiplier Model explains how shocks to
investment, foreign trade, and government
tax and spending policies can affect output
& employment in an economy

3
Output Determination with
Saving & Investment

4
Output Determination by
Consumption & Investment
• The total spending (or C+I ) curve shows the
level of desired expenditure by consumers and
business corresponding to each level of output

5
The Adjustment Mechanism
• An economy is in equilibrium when
planned spending (on C and I) equals
planned output
• A discrepancy between planned output
and planned spending leads to a change
in output

6
7
An Arithmetic Analysis

8
1
MPS

The Multiplier
• The number by which the change in
investment must be multiplied in
order to determine the resulting
change in total output

9
1
• Change in output = X change in investment
MPS

1
= X change in investment
1  MPC
10
Graphical Picture of the Multiplier

11
The Multiplier Model in Perspektif
• When investment or other spending increases in an
economy with excess capacity and unemployed workers,
much of the extra spending will end up in extra real
output, with only small increases in the prices level.
However, as economy reaches its capacity, it is not
possible to coax out more production at the going price
level. Hence, at full employment, higher spending will
result in higher price levels rather than higher real output
or employment.
• The Multiplier Model Compared with the AS-AD Model
The multiplier model explain the working of AD by showing how
consumption, investment, and other variables interact to determine
AD – it is a special case of the aggregate demand-and-supply
model
12
13
FISCAL POLICY IN THE MULTIPLIER MODEL
• How Government Fiscal Policies Affect Output
GDP = C + I + G + X
• Impact of Taxation on AD

14
• A Numerical Example

15
Fiscal-Policy Multipliers
•Government Expenditure Multiplier
increase in GDP resulting from an increase
of $1 in government purchase of goods and
services

•Government Expenditure Number


= Investment Multiplier Number
= Expenditure Multipliers
16
17
• Impact of Taxes
Tax Multiplier = MPC x Expenditure Multiplier
• Fiscal Policy in Practice

18
• The Other Partner in Stabilization
Policy

Fiscal Policy + Monetary Policy

19
Multipliers in Action

• Beyond the Multiplier Model


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