The Multiplier Model - The multiplier model is a model that emphasizes the effect of fluctuations in aggregate Demand, rather than the price level, on output - For small and moderate fluctuations in AD, most economists believe that the AS/AD model Provides a better sense of how the macroeconomy operates. The Aggregate Production Curve - Aggregate production is the total amount of goods and services produced in every industry In an economy - Production creates an equal amount of income Aggregate Expenditures - Aggregate expenditures are the total amount of spending on final goods and services - This amount consists of four main expenditure classifications - Consumption - Investment - Government spending - Net foreign spending Autonomous and Induced Expenditures - Autonomous expenditures are expenditures that do not systematically vary with income - They are unrelated to income - They remain constant at all levels of income - Induced expenditures are expenditures that change as income changes - They are directly related to income - When income changes, they change by less than income The Marginal Propensity to Expand - Marginal propensity to expand is the ratio of the change in aggregate expenditures to a Change in income. - The mpe is an aggregation of the change in each of the components of aggregate Expenditures to changes in income. - The mpe, always between o and 1, is the slop of the aggregate expenditures curve - The marginal propensity to consume is the change in consumption that occurs with a Change in income. - The mpc is the most important component of the mpe - The mpc is less than one because individuals consume only a portion if an Increase in income. - Marginal propensity to import is the change in imports that occurs with a change in income - Income taxes reduce people’s income which lowers their expenditures - Taxes reduce the mpe Autonomous Shifts in the Expenditures Function - Changes are usually classified by which of the four subcomponents of autonomous Expenditures changed. - Autonomous consumption - Autonomous investment - Autonomous government spending - Autonomous net exports - All of these can change suddenly, and, when one or more do, the AE curve shifts up or down