Macro 3.2 Spending Multipliers and GDP

This video covers topic 3.2 of the AP Macroeconomics Course Exam Description (CED). Marginal Propensities and Multipliers. It covers average propensities to save and spend, along with marginal propensities to save and spend. You will also learn about spending and tax multipliers and how to use them to calculate maximum changes in overall spending.
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[@productivitymachine731]

At 14:09, why do you multiply by 5 and -4, how did you get those numbers?

[@ReviewEcon]

The spending multiplier is 1/mps. The tax multiplier is -mpc/mps. With a .8 mpc and .2 mps, the spending multiplier is 5 and the tax multiplier is -4. I hope that helps!

[@wendywang4096]

@@ReviewEconhow do you know if we should use mps for government spending and mpc for taxes?

[@ReviewEcon]

Both can be used for both. If you are given MPS, 1-MPS=MPC. If you are given MPC, 1-MPC=MPS. Spending multiplier is 1/MPS or 1/1-MPC. Tax multiplier is -MPC/MPS (or absolute value B1 less than the spending multiplier). I hope that helps!

[@haeon2896]

question on 12:01 about tax multipliers with transfer payments. If tax is decreased, shouldn't that result in a decrease in transfer payments since the government earns less revenue by tax?

[@ReviewEcon]

Good question! It turns out taxes and spending are not tied to each other when. It comes to the government. When taxes are greater than spending, the government borrows the difference. You will learn more about that in unit 5. For now, just know that tax decreases do not necessarily mean a decrease in transfer payments. I hope that helps!

[@gukaus2377]

In 9:41, you said the $10k purchase of new capital equipment can increase overall national *income* instead of *GDP*. What exactly is the difference, and can national income and GDP be used interchangebly?

[@ReviewEcon]

In these economic models, national income (think income approach to GDP), real GDP, and real output, are all equal. I hope that helps!

[@gukaus2377]

@@ReviewEcon thank you so much. i consider you as my real teacher

[@myplace571]

hello! i was wondering why the tax multiplier formula is -MPC/MPS, why is MPC negative? a few other resources simply wrote it as MPC/MPS. please explain thank you

[@ReviewEcon]

The tax multiple is technically negative because an increase in taxes causes a decrease in real GDP and a decrease in taxes causes an increase in real GDP. This inverse relationship means the multiplier is negative. That said, you can see it expressed as a positive number and I expect a positive number would be accepted by the CB, since some resources express it as a positive number. Just make sure you know the inverse relationship between changes and taxes and changes in real GDP. I hope that helps!

[@myplace571]

this certainly helped thank you always@@ReviewEcon

[@cye8281]

Ur sooo underrated😢❤

[@JgfFcbn]

how do you know to use the mpc or mps to find multiplier

[@ReviewEcon]

Use what you have. If you have the mps, the spending multiplier is 1/mps. If you have the mpc, it's 1/(1-mpc).

[@wendywang4096]

@@ReviewEcon okay thank you!

[@MrTugwit]

At 8:46 you have: ΔY = ΔC + ΔI + ΔG + ΔNX. That means that ΔG produces an equal ΔY, so there is no multiplier. At 13:47 you have: - 20 x 5 = - 100. That's illegal subtraction before multiplying, P-E-MD-AS. If you had put in the add operators where you should have used them, you would have noticed that your multipliers use illegal math.

[@ReviewEcon]

A change in any component of GDP leads to changes in the others as well because spending for one group is income for another group. Some of the new income is spent leading to a larger increase in GDP. And that multiplier is definitely on the AP macro exam. I'm not sure I agree with your calculation critique, but I see your point. And these aren't my multipliers. They are macroeconomics' 😅. Good luck with this year's exams!

[@MrTugwit]

@@ReviewEcon My point is that you're using illegal math. The multiplier may be on the exam, but it's still nonsense. From ΔY = ΔC + ΔI + ΔG + ΔNX, you get 1 = 0 + 0 + 1 + 0. The increase in government spending produces an equal increase in national income. There is no multiplier. And notice that ΔC/ΔY = 0/1. Why are you using a non-zero value for the marginal propensity to consume?

[@ReviewEcon]

I didn't use the formula you laid out, and it is not representative of the theory because a change in G causes a change in C, I, and Xn through the multiplier effect. That said, the point of this channel is to teach AP econ students what they need to know on the AP econ exams. This is not a channel arguing for or against any specific theories. If you are an AP macro student and you have a specific question about multipliers on the AP macro exam, please ask it. Otherwise, take solace that most other Atlas Shrugged fans will agree with you. 😄

[@MrTugwit]

@@ReviewEcon You have the components of ΔY = ΔC + ΔI + ΔG + ΔNX written out "in longhand" at 8:46. It is representative of Keynes's theory. In 1936 he used just ΔY = ΔC + ΔI, and had government doing the investment. 1 = 0 + 1, an increase in government investment produces an equal increase in national income, because the marginal propensity to consume out of investment is zero. The change in G does not cause a change in C, I, or NX. It only causes a change in Y. It's right there in the math. He also used ΔY = (1/(1-mpc)) ΔI. Since ΔY equals ΔI, ΔY = (1/(1-0)) ΔI. It's been there from the very beginning. Unless mpc is zero, the math is not legal.

[@ReviewEcon]

Not sure how to explain it further. The variables you assume are constant are not.