11 good questions on "The Multiplier Process and Inventory Adjustment"
- A change in the planned investment
- can occur because of a change in interest rate
- A shift in the aggregate consumption function CF (changes in the vertical intercept AC)
- can occur when there is a change in the level of planned aggregate wealth due to rise in housing prices
- autonomous change in the planned aggregate expenditure is a change in the desired level of spending by
since the there is a decrease in inventories firms will produce more
GDP will increase by grater than the change in autonomous aggregate expenditure
which leads to a rise in real GDP
which leads to an increase in disposable income .
- The increase in YD lead to a rise in consumer spending, sets off a second round of increase in real GDP
- which lead the disposable income and consumer spending to increase further.
- we call what happened the ffects of the multiplier
- the mulitplier is calculate by taking the change in income, divided by change in aggregate expenditure.
- It mean that
- the change in income-expenditure equilibrium GDP (income from expenditure) is larger thatn the autonomous change in planned aggregate expenditure.
- each increase in disposable income and each corresponding increase in spending is smaller than the pervious round, because MPC is less than 1
- The increase in real GDP diminishes from each round to the next, to the point where the increase of real GDP is negligible
- The increase in YD and real GDP diminishing because at each round some of the increase in disposable income leaks out into savings.
- the paradox of thrift describes what happens when in households and firms cut their spending anticipating tough times
- this causes a fall in income expenditure quilibrium GDP (THAT IS SEVERAL TIMES LAREGER THANTHE FALL IN OVERALL SPENDING) .
- which leads real GDP to fall leaving consumers and producer worse off.
- which leads to a depressed economy, leaving household and firms worse off than if they had acted by spending during this time.
- so lavish spending makes consumer and producers better off
autonomous change in planned aggregate expenditure plays an important role in expansions
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