Created 3/10/1998
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Stepping Through the Multiplier

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     

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

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