# Macroeconomics

in an economy. By knowing how households allocate their additional income between spending and saving, policymakers can design policies thataimtostimulateconsumption,boostsavings,orachieve specifc economic goals. Expenditure Multiplier Now that we know how to calculate MPC and MPS, we can measure the effect of a change in autonomous spending or variables on real GDP (also referred to as national income). Thesimple expendituremultiplier calculates theeffectofachangeinADcomponentsorautonomous aggregate expenditure on real GDP using the followingformula: ∆ ∆ Assumethatinvestmentinaneconomyincreasesfrom$20billionto$60billionleadingtoanincreasein GDP from $100 billion to $180 billion. $ $1 68 00 −$100 −$20 $$ 48 00 We can conclude that every $1 in investment generates an additional national income of $2. Multiplier = Multiplier = = = 2.

Another method used to calculate the multiplier is the following: = 1 1− 1 After getting the multiplier, the fnal impact on real GDP is calculated as follows: Multiplier =

Final impact on GDP = multiplier × autonomous change

Numerical Application: AssumethataneconomyhasanMPC=0.6.Howwilla$10millionincreaseingovernmentspending affect real GDP? Step 1: Calculate the multiplier:

Multiplier = 1 1− 1 1−0.6 Step 2: Calculate the fnal impact on real GDP: = = 2.5.

Final impact on GDP = multiplier × autonomous change = 2.5 × $10 million = $25 million.

Step 3: Analyze the fnal fgure:

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