A lower value for the multiplier is caused by a smaller marginal propensity to consume.
The multiplier will decrease as tax rates increase.
Any shocks to investment will have less of an impact on the economy.
We can see how auto matic stabilizers work now that we have introduced income taxes.
Transfer payments in the United States have increased since World War II.
Higher tax rates will make the economy less vulnerable to shocks.
The link between fluctuations in disposable personal income and fluctuations in GDP is not as strong with higher taxes and transfer pay ments.
Spending is more stable because disposable personal income is more stable.
The economy is stable and the multiplier is smaller.
Automatic stabilizers work silently in the background without requiring explicit action by policymakers.
Policymakers don't have to change tax rates if total tax collections rise and fall with GDP.
When it is difficult to obtain a political consensus for taking any action, and policymakers are reluctant to use the automatic stabilizers, it is important that they work without any laws being enacted.
The stability of the economy can be attributed to other factors.
Many consumers base their spending decisions on their long-run average income or permanent income, not just their current level of income, as we explained in the last chapter.
Households will not be very sensitive to changes in their current income if they base their consumption on their long-run income.
If their income temporarily increases, they are likely to save and not spend it.
If their income temporarily goes down, they are likely to maintain their consumption and save less.
When consumers base their consumption on their long-run average income, their current income will be smaller than their long-run income.
The multiplier will be small because the MPC is small.
Firms' knowledge that the federal government will be stabilizing the economy is an important factor in promoting the stability of the economy.
If the government intervenes to offset the severity of recessions, firms are less likely to decrease investment spending.
Investment spending is a very volatile component of spending and stabilizing it will help the economy.
The same logic is used by consumers.
They are less likely to change their spending if they believe the government will help the economy.
Changes in firms' inventory management practices have contributed to the stability of the economy.
Manufacturing firms used to keep large inventories at their factories.
The demand for firms' products would decrease if the economy slowed.
Firms would be forced to cut production even further to reduce their stock of inventories.
In recent times, U.S. firms have paid more attention to forecasting changes in the demand for their products and have adopted sophisticated computer manage ment techniques to reduce the size of inventories they normally hold.
Firms don't have to change their production as much because of less inven tory.
The inventory cycle is no longer an important factor for economic instability.
It is important to understand how exports and imports affect the level of GDP with international trade becoming more important.
equilibrium income is determined by two
GDP is affected by how other countries demand goods and services produced in the United States.
There's an increase in demand for goods produced in the United States when there's an increase in exports.
There is an increase in foreign goods purchased by U.S. residents.
The demand for U.S. goods is reduced by imports.
If we import $3 billion of automobiles but spend $10 billion on them, we have spent only $7 billion on U.S. automobiles.
To get a clearer picture of the effects on GDP from exports and imports, we need to ignore government spending and taxes.
In the appendix, we present a complete model with both a domestic government and foreign countries to whom we sell our exports and from whom we buy our imports.
With the level of income, we assume that imports increase.
As their income increases, consumers will import more goods.
The MPC in this example is adjusted for imports.
Figure 11.12 shows how equilibrium output is determined in an open economy that engages in trade with the rest of the world.
We plotted planned expenditures for U.S. goods and services on a graph and found equilibrium income where it intersects the 45deg line.
The value of output when expenditures for U.S. goods cross the 45deg line is called equilibrium output.
When the demand for domestic goods is equal to the output, output is determined.
Let's look at the application of the model we just developed.
Suppose Japan buys $5 billion worth of goods from the United States.
An increase in exports will increase the level ofGDp.
The increase in income will be larger than the increase in exports.
The multipliers are adjusted for trade.
A $5 billion increase in exports will lead to a $12.5 billion increase in GDP.
The increase in demand for foreign goods was more pronounced in developing countries.
The developing countries were pulled along by the United States.
Growth in other parts of the world, including China and India, was still robust when the U.S. economy began to slow in 2007.
Our exports were spurred by their demand for U.S. goods.
GDP will not fall any further.
The "locomotive" for global growth was described in our story as China remained a locomotive during the downturn.
The United States grew its share of the world economy from 26 percent in 1992 to 32 percent in 2001.
If we become more attracted to foreign goods, our marginal propensity to import will increase.
Panel B shows the effect of an increase in imports.
Our domestic political leaders want to sell our goods abroad.
Increased U.S. exports will increase GDP and reduce unemployment.
We can understand how a recession abroad could cause a decrease in imports of U.S. goods.
We can understand why politicians will find "buy American" policies attractive in the short run.
The output will be higher if U.S. residents buy U.S. goods instead of imports.
Other countries like to see the United States grow quickly.
The Aggregate Demand Curve curve is related to the incomeexpenditure model.
The income-expenditure model was used to understand short term economic fluctuations.
The income-expenditure model is based on the fact that prices don't change.
The aggregate demand curve shows equilibrium output and prices.
In Chapter 9 we talked about how a lower price level will increase demand for goods and services through wealth effects, interest rate effects, and international trade effects.
We can create all the other points on the aggregate demand curve by either raising or lowering the aggregate price level.
The income-expenditure model can be used to determine the level of output and the corresponding point on the aggregate demand curve.
The basic foundation for the aggregate demand curve is provided by the income-expenditure model.
The level of equi librium output and the corresponding point on the aggregate demand curve are determined by the income-expenditure model.
We have a higher level of output because the price hasn't changed.
The aggregate demand curve is shifted to the right from aD0 to aD1.
Increases in planned expenditures that are not directly caused by changes in prices will shift the aggregate demand curve to the right, while decreases in planned expenditures will shift the curve to the left.
Aggregate demand and supply curves are used in the remaining chapters.
We can understand movements in both prices and output.
The underlying foundation for the aggregate demand curve is provided by the income expenditure model developed in this chapter.
Chapter Summary and Problems was developed.
Increases in planned expenditures by households, the govthe income-expenditure ernment, or the foreign sector lead to increases in equilibrium model, which is useful for output.
The initial increase was larger than the put we developed.
There are two parts to consumption spending.
Increases in imports lead to decreases in equilibrium output.
The income-expenditure model can be used to derive consumer sentiment.
The level of gate demand curve is the other part.
All the problems are assignable in MyLab Economics.
Discuss the income-expenditure model.
Expenditures incurred are both true and false.
At any point on the 45deg line, expenditures are planned.
Understanding inventory behavior is 1.5 To calculate equilibrium income in a simple model, use the simple Equilibrium Output and the Consumption Function income-expenditure model.
Add substantially to inventories in their equilibrium output will be 50.
Suppose economists see an increase in inventories.
The 45deg line is understood.
The multiplier will decrease if the MPC decreases.
An economy has a monetary policy.
Many policies attempt to increase savings rates between consumption expenditures and the level of the United States.
The creation was a policy.
The con for savings will be shifted by a decrease in consumer confidence.
You would expect the consump save to not lead to higher savings if housing prices fall.
In fact, tion function to shift.
Why is this sloping?
The new savings function period is when consumers wish to increase their savings.
Their balances would have fallen with a decline in equilibrium.
Income and investment both fall.
A simple model is being solved.
The equilibrium income can be determined.
Gerald Ford proposed that taxes be decreased but that, to investment level and to show how equilibrium avoid increasing the government budget deficit, govern income is determined.
Compared to other countries, tax revenues tend to rise.
If we assume GDP.
A good proxy for the size of automatic stabilizers is the level of government spending, as a share of GDP is additional revenue on discretionary items in the bud.
You can use your answer to explain Versailles, which ended World War I, and his intuition that the post-World War II monetary system is responsible for the multiplier during recessions.
Discuss the role of imports and exports in determining equilibrium income.
Income will be stable if the marginal propensity to import is reduced.
As income increases, the multiplier for taxes is greater than the multiplier for goods and services.
GDP will be affected by an increase in the tax rate.
World increase in income will increase imports.
The world tried to help the same amount with an increase in both government spending and taxes.
Suppose that a country wants to increase its GDP by 100.
The try's exports cause international repercus to be 0.8.
The income-expenditure model is used to calculate the government spending multiplier.
How much should taxes on imports from Europe be?
In response to U.S. policies, Europe would have to choose between what we see and what we don't see.
How can we restrict imports from the United States?
The Open-Economy Multipliers are used.
The marginal propensity to consume responds to a leftward shift in the aggregate demand curve.
The MPC should be equal to 0.8.
The marginal grow if the MPC is 0.8.
Some of the belief is based on long-run propensity to import.
The $20 billion in government spending will shift firms to innovate if they compete in export markets.
Falling exports and demand.
If foreign countries grow less quickly than anticipated, U.S. exports will fall.
The income-expenditure model can be used to show how the decrease in exports will affect U.S. GDP.
Explain the income-expenditure model using your results.
Suppose there is a wealth demand curve.
The aggre gate demand curve will not be affected by an increase in the price level.
Each class member is asked to fill out a table.
Each column has a row of savings and disposable income.
As your income increases, you consume more entertainment and total consumption.
The logic of the income-expenditure model was developed in the chapter.
A few formulas were also referred to.
The formulas for equilibrium income and the mul tiplier are explained in this appendix.
We do three things in this appendix, one of which is a simple formula for calculating equilibrium output for the simplest economy in which there is no government spending or taxes.
The equilibrium level of output is what it means.
The formula is used for equilibrium output in the text.
Let's find a way to increase investment in this economy.
We will get a formula for the change in output that comes from investment changes.
Another way to derive the formula is here.
This way helps to show its logic.
The output will rise by $1 because spending determines it.
The marginal propensity to consume will increase when the change in income is greater.
Government spending and taxes have been introduced.
The tax multiplier is larger for a reduction in taxes than it is for an increase in government spending.
Consumers will save a part of their income increase from the tax cut.
The government spending multiplier is larger than the tax one.
For equal dollar increases in taxes and government spending, the positive effects from the spending increase will outweigh the negative effects from the tax increase.
A $10 billion increase in taxes and government spending will increase GDP by $10 billion.
equilibrium output is derived from government spending, taxes, and the foreign sector.
When output equals demand, equilibrium output occurs.
We need to include planned expenditures from both the government and the foreign sector.