MPC and the Multiplier Effect

[@MrTugwit]

How do you explain that where the red AD1 line intercepts the vertical spending axis, income is zero. It's not possible to spend money and produce zero income.

[@lobsey]

MrTugwit Thats a good question. Every economy needs to spend money in order to function, even if income is zero. This could include individuals dissaving (going into their savings, to spend when income is zero) or using credit cards. It could also be governments and businesses borrowing money. In economics, it is known as the level of AUTONOMOUS CONSUMPTION - the minimum level of spending an economy needs to have just to continue functioning.

[@MrTugwit]

Steve Lobsey When they spend the $1 (that they took out of savings or borrowed), it must produce $1 of income. Where the AD1 red line intercepts the vertical spending axis, spending the $1 produces zero income. That's not possible.

[@lobsey]

MrTugwit The AD line is not showing how much income is produced with each dollar spent - it shows ow many dollars are spent at each level of income. So the question isn't whether consumption will generate income, but at what will be the level of consumption at each level of income? If your income was equal to zero, you will still need to spend money (on food, for example) which would mean at Y=0, spending is greater than zero, which is a case of dissaving. The household consumption function has an equation in the form C = a + cY, where: C = Consumption a = autonomous consumption c = MPC Y = Income When Y = 0 there is $0 in what is called induced consumption (cY), but because people still need to spend money to survive, there will still be $a worth of autonomous consumption. You are right in that the future impact of that dollar spent would be income generated, but at that point in time when the income level is $0, there must be some level of autonomous consumption. To say that AD starts at the origin says that the economy with no income would not spend any money, which is untrue. I have explained it (but probably in less detail than I have here) in this video: kzbin.info/www/bejne/q6Hbe4eHoJJlh7c

[@MrTugwit]

Steve Lobsey If the graph doesn't show how much national income is produced, by the $1 of autonomous spending, then you can't use it to show how that $1, will affect national income, through the multiplier effect. And it's not the "future impact". The instant impact of $1 of autonomous consumption, is $1 of income. I didn't say that an economy with no income would not spend money, but that the instant that the first $1 is spent, there is $1 of national income. And you left the deltas out of your equation. It should be: ΔC = Δa + cΔY where Δa is the $1 increment of autonomous consumption. ΔC = Δa + cΔY 0 = 0 + c 0 [start at zero increment] 0 = 0 + 0 [multiply] 1 = 1 [add] ΔY = ΔC + ΔI + ΔNX + ΔG 1 = 1 + 0 + 0 + 0

[@lobsey]

MrTugwit I can see what you are saying, although the function of the line is in the form C=a+cY, you are looking at the effect of a change which leads to the equation you used. What would you say the level of consumption would be when national income is zero?

[@humancore9827]

AD AS both are upward sloping?? lol?

[@lobsey]

+human core This video kzbin.info/www/bejne/n2Wbd3hspa-Vgq8 expplains the 2 models, one of which you are familiar with, with a downward sloping AD curve. That model has Price on its vertical axis. This model has expenditure on its vertical axis. As demand expenditure (C+I+G+X-M) rises as income rises, the AD curve will slope upwards.