Read the summary and the most important questions on Macroeconomics Canadian Edition | 9781319120085 | Paul Krugman

• 11 Income and Expenditure

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• What are the assumptions of the multiplier on consumer spending

  1. Producers are willing to supply output at a fixed price
  2. interest rates is given
  3. no government spending and no taxes
  4. exports and imports are zero

• What do we mean for business and consumers spending an additional dollar when we say producers willing to supply additional output at a fixed price

  When consumers or businesses buying investment goods decide to spend an additional dollar, it will translate into the production of an additional value of goods and services without inflation, or a rise in the overall price.

• What will happen to changes in aggregate expenditure as a result of the supply of additional output being fixed

  As a result, of the supply of additional output being fixed changes in aggregate expenditure translate into changes in aggregate output, as measured by real GDP.

• What is the reason that the total real GDP is limited to a number even if income increases, why dont we spend all the money, why is there decreasing returns to scale in spending when the is increase in income?

  • That is because at each stage of expansion, as disposable income rises so of the income gets leaked out because it is saved.

• How much of an addtional income dollar of disposable income is saves depends what? And what is that?

  The Marginal propensity to save MPS

• What leads to a rise in consumer spending and a rise in real GDP (wealth effect)?

  An increase in asset  prices makes owners feel richer therefore the spend more.

• What does self governing mean in the context of autonomous change in  expenditure? And what is autonomous change in  expenditure?

  • it means that the rise in consumer spending is the cause of the rise in real GDP not that effect not the result of it.
  • the initial rise in consumption occurs first and then it is followed by the rise in real GDP.

• What is the importance of multiplier effect? what does the size of the multiplier depend on? And why? Formula?

  • we use it to determines how large each round of expansion is compared to the previous round, by applying the size of the MPC to determin that ratio
  • It is the ratio of the total change in real GSP caused by an autonomous change in aggregate expenditure
  • the size of the multiplier depends on the autonomous change in aggregate expenditure.

  • multiplier= change in Y/change in AE = 1/(1-MPC)

  • Y is real GDP, AE autonoumous expenditure.

• What determines how much saving occurs

  The higher the MPC the higher less disposable income leaks out into savings.

• In what situations do the formula for the multiplier change?

  When taxes and foreign trade is introduced.