Multimedia Created 3/10/1998 Go to DeLong's Home Page

Stepping Through the Multiplier

J. Bradford DeLong
delong@econ.berkeley.edu
http://www.j-bradford-delong.net

Suppose that the marginal propensity to consume c' is 0.6, and that initially aggregate demand is $100 billion a year higher than national product, so that inventories are falling by $100 billion a year. Suppose that firms step up production by $100 billion a year. National income rises by $100 billion a year as well, consumption spending rises by $60 billion, and so aggregate demand rises by $60 billion. The $100 billion increase in national product has lowered the gap between aggregate demand and national product--but has lowered it by only $40 billion, not by $100 billion.

Income-Expenditure Diagram    The Multiplier    The Multiplier and the MPC

Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

This document: http://www.j-bradford-delong.net/multimedia/Multiplier_Steps.html

Search This Website