Fun with MPC and MPS

MPC + MPS = 1
The spending multiplier effect

• An initial change in spending causing a larger change in aggregate spending, or agggregate demand (AD)
• Multiplier = Change in AD/Chnage in spending = AD/ C, I, G, Xn
• Why? expenditures and income flow continuously which sets off a spending ^ in the economy.

Calculating spending multiplier

• 1/1-MPC pr 1/MPS
• Multiplier is + when increase in spending but - when decrease in spending

Calculating tax multiplier

• When the government texes, the multiplier work in reverse.
• Money leaving circular flow
• Tax mulitplier = MPC/ 1- MPC or -MPC/MPS
• If there is a taxcut, then the multiplier is +, more money in circular flow

Why prices tend to be sticky

• Menu cost
• Fear of price wars
• Wage contracts
• Minimum wage
• Moral effort and productivity

Output level low, unemployment increase, GDP decrease and there is a recession.
Upward sloping, output expands as total increase
Firms cant respond in increase in demand by increase output.