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UNIT 3: Multipliers

The Spending Multiplier Effect
*An initial Δ in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or demand (AD)
       Ex. If the government increases defense spending by $1 Billion, then defense contractors will hire will and pay more workers, which increase aggregate spending by more than the original $1 Billion.
Multiplier = ΔAD /Δ C, I, G, or Xn Why does this happen?
-expenditures and income flow continuously which sets off a spending increase in the economy.
*Calculating it
-can be calculated from MPC or MPS
      *Multiplier = 1/(1-MPC) or 1/MPS
-(+) when there is an increase in spending, (-) when there is a decrease

Calculating the Tax Multiplier
-when gov't taxes, multiplier works in reverse
-b/c now money is leaving the circular flow
-ALWAYS negative
= -MPC/1-MPC or -MPC/MPS
-If there is a tax-cut, then the multiplier is +,b/c there is now money in the circular flow.

An Explanation Video:


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