Full AE model + Multiplier Flashcards
Autonomous change
Any autonomous change is caused by a factor other than a change in the level of income
It is independent of the level of income
Induced change
Related to a change in the level of income
Multiplier effect
Any autonomous change in a component of AE will lead to a change in the level of economic activity greater than the initial autonomous change
What an autonomous change leads to
An autonomous increase in a component of AE leads to an upward shift of the AE curve. Causing a new equilibrium level of income and output to be established at a higher level of economic activity
Reference to model
A movement from AE to AE1 resulting in an increase in the equilibrium level of income from Ye to Ye1
Relation to the multiplier
This increase in economic activity is greater than the initial autonomous change in spending as it creates income for individuals and firms in the economy who will save some of the income and save the rest
This increase in spending generates rounds of income and induced consumption spending as one mans spending becomes another mans income
Reference to multiplier model
The initial autonomous change in AE is represented by a-b. This leads to extra income for individuals and firms b-ç some of which is spent or saved
At each stage, the extra spending is reduced due to the withdrawal or leakage of saving until a new equilibrium is established
Multiplier formula
K= 1/MPS
Full five sector formula
K= 1/MPS + MPT + MPM
Multiplier definition
Is the amount by which real income or GDP changes after an initial change in expenditure