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Answer to Question #68878 in Microeconomics for Jagmeet

Question #68878
Explain how increases in C, I, or G, or decreases in T cause output to increase by more than the initial increase in AE ?
Expert's answer
A multiplied effect of increase in C, I, or G, or decreases in T on total output takes place because consumption depends on total income (or total output). When the last one increases in response to mentioned changes in C, I, T and G, consumption also enlarges and income rises further. This chain effect is infinite and depends on MPC - marginal propensity to consume.
These multipliers are derived as infinite geometric series:
∆Y/∆G = ∆Y/∆I = 1/ (1 - MPC)
∆Y/∆T = -MPC/ (1 - MPC).
∆Y/∆C = 1/MPC

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