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Makroekonomia - program rozszerzony
Lesson summary: The expenditure and tax multipliers
In this lesson summary we cover the key takeaways and terminology related to spending multipliers and tax multipliers. Topics include how to calculate the expenditure multiplier and the tax multiplier.
Podsumowanie lekcji
How can an additional
The fraction of how much is spent will determine the ultimate increase that the first dollar will cause—the higher the fraction that is spent, the bigger the multiplier. That means that if there is a change in autonomous spending, such as the government decides to increase government spending, the final impact on real GDP will depend on the fraction that is spent instead of saved.
Kluczowe terminy
| Term | definition |
|---|---|
| multiplier effect | when a change in spending leads to a much larger change in real GDP than the initial change; for example, if a government spends |
| change in autonomous spending | changes in spending that happen in response to something besides an increase in income; for example, if the government decides to spend money on building a new bridge because they want to build a bridge (not because they have extra income lying around) or one firm decides to build a |
| marginal propensity to consume ( | the proportion of any additional income that is spent; for example, if your |
| marginal propensity to save ( | the proportion of any additional income that is saved; note that |
| expenditure multiplier | the magnitude of how much real GDP will change in response to an autonomous change in aggregate spending; for example, if the expenditure multiplier is |
| tax multiplier | the ratio of the total change in real GDP caused by a change in taxes; for example, if the tax multiplier is |
Do zapamiętania — najważniejsze zagadnienia
A
Governments usually spend money if they have a reason, or an objective to spend it. They don’t spend more money just because the economy is doing well and national income is increasing (in fact, we will learn later that it is usually the opposite). This kind of an increase in spending called an autonomous increase in government spending.
A change in autonomous spending will lead to a much larger final change in real GDP because of the multiplier effect. That spending will have a much larger final impact on real GDP. For example, if the government buys apples from Jack, Jack then uses that money to buy latte’s from Jill, and Jill buys a computer from Pedro. The final impact of the government’s purchase of apples will be bigger than just that purchase because we add up the apples, lattes, and computers in real GDP.
The expenditure multiplier
The expenditure multiplier shows what impact a change in autonomous spending will have on total spending and aggregate demand in the economy. To find the expenditure multiplier, divide the final change in real GDP by the change in autonomous spending.
For example, if the government spends
How does that happen? The government buys a rocket from Rocket’s R Us for
We can see the impact of this multiplier effect on in the table below:
| Round | amount spent = additional income x | cumulative impact on real GDP |
|---|---|---|
| 3 The t-shirt sellers use t-shirt revenue to buy kayaking lessons | ||
| * | * | * |
| Eventual effect |
But wait, there’s more! The expenditure multiplier can also tell us how much more or less spending is needed to close an output gap. For example, if we know the multiplier is
The tax multiplier
A change in taxes also results in a multiplier effect. The tax multiplier tells you just how big of a change you will see in real GDP as a result of a change in taxes. For example, imagine the government gives out a total of
We can see how this plays out in the table shown below. Suppose of spending
| Round | amount spent= additional income x | cumulative impact on real GDP |
|---|---|---|
| 2 t-shirt sellers use t-shirt revenue to buy kayaking lessons | ||
| * | * | * |
| Eventual effect |
Why is it less? Notice that there is a round missing here: the initial
The
The more that is spent out each dollar, the bigger the multiplier will be. Why? Because if money is spent, that money becomes income to another agent who then spends it, and that continues with a chain reaction of spending.
The tax multiplier tells us the final increase in real GDP that will occur as the result of a change in taxes. Interestingly, the tax multiplier is always smaller than the expenditure multiplier by exactly
The
The marginal propensity to consume is the change in spending that occurs when income changes, divided by that change in disposable income. If someone spends
There are only two things you can do with money: spend it or save it. That means whatever proportion not spent must be saved. Economists call this the marginal propensity to save (
Najważniejsze równania
Marginal propensity to consume (
Marginal propensity to save MPS
Expenditure multiplier
Tax multiplier
Final impact on GDP
For example, if the the tax multiplier is
So an increase in taxes of
Częste błędy
- Some people think that a
- A common misstep is to forget that the spending multiplier and the tax multiplier have the same sign. The tax multiplier is negative, the expenditure multiplier is positive. This is because an increase in aggregate expenditures will increase real GDP, and an increase in taxes will decrease real GDP.
- You won’t be able to use a calculator on the exam. Most test writers know this and take this into account. One of the ways a teacher or test grader might help you out is to use MPCs and MPSs that have multipliers that are easy to calculate. Some commonly used MPCs and their corresponding multipliers are given in the table below. However, don’t just memorize these! You should always show all of your work on free-response questions.
| Value of | Expenditure multiplier | Tax multiplier |
|---|---|---|
Pytania do dyskusji
- A
- Assume that the government of Libbyland has a balanced budget. However, the government in Libbyland implements a
- Jacksonia has a recessionary gap of
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