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

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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