AP Macroeconomics AMSCO Guided Notes
3.2: Multipliers
AP Macroeconomics Guided Notes
AMSCO 3.2 - Multipliers
Essential Questions
- How do changes in income and taxes effect spending, savings, and the GDP?
I. What Is the Multiplier Effect?
1. What is a multiplier and how does the multiplier effect create changes throughout the economy?
2. How can an increase in one economic activity result in a larger increase in GDP than the initial change?
II. Marginal Propensity to Consume and Save
A. Marginal Propensity to Consume and Save
1. What is the marginal propensity to consume (MPC) and how is it calculated?
2. How does income level affect a household's marginal propensity to consume?
3. What is the marginal propensity to save (MPS) and what is the relationship between MPC and MPS?
B. Autonomous Spending and Disposable Income
1. What are autonomous expenditures and how do they differ from disposable income?
2. How does the multiplier effect work regardless of whether a consumer purchases a small item or an expensive item?
III. The Expenditure Multiplier
1. What is the expenditure multiplier and how does it show the chain reaction of spending through the economy?
2. What are the two formulas for calculating the expenditure multiplier and what do they reveal about the relationship between MPC and MPS?
3. Why does a government or business expenditure have a larger multiplier effect than an individual's spending?
IV. The Tax Multiplier
1. What is the tax multiplier and how do tax cuts and tax increases affect disposable income and spending?
2. What is the formula for calculating the tax multiplier?
3. Why does the tax multiplier have a smaller impact on GDP than the expenditure multiplier?
Key Terms
multiplier
multiplier effect
marginal propensity to consume (MPC)
marginal propensity to save (MPS)
disposable income
expenditure multiplier
tax multiplier (TM)