Page 138 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 7: Concept of Multiplier

Recall that y =ΔI . So the process of dynamic multiplier can be generalized as follows: Notes
1
2 3 n 1
ΔY I + I b I b ........ I b
2 3 n-1
= ΔI 1 + b + b + b +........ b
1
= ΔI
1 – b
The above equation gives the working of the dynamic multiplier.

Caselet Fiscal Multipliers Varies over Business Cycles

lainly, the size of the multiplier varies considerably over the business cycle.
For example, in 1985 an increase in government spending would have barely
Pincreased output. In contrast, a dollar increase in government spending in 2009
could raise output by about $1.75. Typically, the multiplier is between 0 and 0.5 in
expansions and between 1 and 1.5 in recessions.
Note the size of the multiplier tends to change relatively quickly as the economy starts to
grow after reaching a trough. Thus, the timing of changes in discretionary government
spending is critical for effectiveness of countercyclical fiscal policies.
Second, to measure the effects of a broader range of policies, we estimate multipliers for
more disaggregate spending variables, which often behave quite differently in relation to
aggregate fiscal policy shocks.

Specifically, we find that defence spending has the largest multiplier, with the maximum
response of output being $3.56 for every dollar in defence spending in a recession.

Source: www.mostlyeconomics.wordpress.com

Self Assessment

State whether the following statements are true or false:
12. Static multiplier is also called logical multiplier.
13. Static multiplier implies that change in income causes change in investment after a period
of time.
14. Dynamic multiplier is also known as sequence multiplier.
15. According to dynamic multiplier concept, process of change in income involves a time
lag.

7.4 Summary

Spending creates income. It leads to rise in income of those producers on whose goods and
services the spending is made. The spending may be on capital goods (called investment),
on inputs, and on consumption. (It is assumed that there is no government expenditure
and there are no net exports).
Multiplier is defined as the ratio of change in the equilibrium national income to change
in an autonomous variable. A variable is autonomous when it is assumed not to be
influenced by change in income.

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