J. Bradford DeLong
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|
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