Tuberculosis Tuesday, January 15 Whooping Cough Wednesday, January 16

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1 Tuberculosis Tuesday, January 15 Whooping Cough Wednesday, January 16 Learning target: I can explain the multiplier effect, marginal propensity to consume (MPC) and marginal propensity to save (MPS). I can describe how these factors impact fiscal policy. Warm ups: (1) Text your parental/guardian unit(s) to tell them that you need to register for the Macroeconomics AP exam! Registration is on DHHS web page; you can pay when you register or later. District pays for one exam; you can get help to pay for a second one, too. (2) Talk to your neighbor about the multiplier effect. Ask them what happens to the money that you spend at McDonald s and Target.

2 Unit 3a Test Corrections

3 Test Correction Steps 1. Go through the test with your group. Review/discuss/work problems that you got wrong and take notes on the correct answers and how to solve them. 2. At home, complete the test correction assignment for every question that you got wrong.

4 What type of gap and what type of policy is best? What should the government do to spending? Why? How much should the government spend? Price level P 1 LRAS $400 $500 YF AS AD 1 AD 2 The government should increase spending which would increase AD. They should NOT spend $100 billion!!!!!!!!!! If they spend $100 billion, AD would look like this: Real GDP (billions) WHY? 4

5 The Multiplier Effect Why do cities want the Superbowl in their stadium? An initial change in spending will set off a spending chain that is magnified in the economy. Example: Bobby spends $100 on Jason s product. Jason now has more income so he buys $100 of Nancy s product. Nancy now has more income so she buys $100 of Tiffany s product. The result is an $300 increase in consumer spending. The Multiplier Effect shows how spending is magnified in the economy. 5

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7 Effects of Government Spending If the government spends $5 Million, will AD increase by the same amount? No, AD will increase even more as government spending becomes income for other consumers. Consumers will take that money and spend, thus increasing AD. How much will AD increase? It depends on how much of the new income consumers save. If they save a lot, spending and AD will increase less. If the save a little, spending and AD will be increase a lot. 7

8 Marginal Propensity to Consume Marginal Propensity to Consume (MPC) How much people consume rather than save when there is a change in disposable income. It is always expressed as a fraction (decimal). MPC= Change in Consumption Change in Disposable Income Examples: 1. If you received $100 and spent $ If you received $100 and spent $ If you received $100 and spent $100. 8

9 Marginal Propensity to Save Marginal Propensity to Save (MPS) How much people save rather than consume when there is a change in disposable income. It is also always expressed as a fraction (decimal). MPS= Change in Savings Change in Disposable Income Examples: 1. If you received $100 and save $ If you received $100 your MPC is.7 what is your MPS? 9

10 MPS = 1 - MPC Why is this true? Because people can either save or consume.

11 This Way Thursday, January 17 Front Door Friday, January 18 Learning target: I can use the spending multiplier to show how fiscal policy impacts the economy. Warm ups: Create an index card with MPC and MPS. Unit 3 final exam will be January 28 and 29.

12 Calculating the Spending Multiplier If the MPC is.5 how much is the multiplier? If the multiplier is 4, how much will an initial increase of $5 in Government spending increase the GDP? How much will a decrease of $3 in spending decrease GDP? Spending Multiplier Total change in GDP = OR = Multiplier x Initial Change in Spending 12

13 How is the Spending Multiplier Used? Multiplier x Initial Change in Spending = Total change in GDP 13

14 Spending Multiplier When working with complex fractions, multiply the numerator and the reciprocal of the denominator. MPC Spending Multiplier As MPC gets smaller, multiplier gets smaller.

15 How is Spending Multiplied? Assume the MPC is.5 for everyone. Assume the Super Bowl comes to town and there is an increase of $100 in sales at Ashley s restaurant. Ashley now has $100 more income. She saves $50 and spends $50 at Karl s Salon. Karl now has $50 more income. He saves $25 and spends $25 at Dan s fruit stand. Dan now has $25 more income. This continues until every penny is spent or saved. What is the multiplier? 2 What is the total change in GDP? 2 x $100 = $200 15

16 The Multiplier Effect Let s practice calculating the spending multiplier. Spending Multiplier = OR 1. If MPC is.9, what is multiplier? 2. If MPC is.8, what is multiplier? 3. If MPC is.5, and consumption increased $2M. How much will GDP increase? 4. If MPC is 0 and investment increases $2M. How much will GDP increase? Conclusion: As the Marginal Propensity to Consume falls, the Multiplier Effect lessens. 16

17 Price level Fiscal Policy Practice Congress uses discretionary fiscal policy to manipulate the following economy. (MPC =.8) P 1 LRAS AS $500 $1000FE Real GDP (billions) 1. What type of gap? 2. Contractionary or Expansionary needed? 3. What are two options to fix the gap? 4. What is the least amount of initial government spending to close gap? AD 2 AD 1 $100 Billion 17

18 Price level P 2 Fiscal Policy Practice Congress uses discretionary fiscal policy to the manipulate the following economy. (MPC =.5) LRAS AS AD 1 $80FE $100 Real GDP (billions) 1. What type of gap? 2. Contractionary or Expansionary needed? 3. What are two options to fix the gap? 4. How much needed to close gap? AD -$10 Billion

19 Homework: (1) Mortons 5-1, 5-2 and 5-4 due Tuesday, Jan. 22 (A) or Wednesday, Jan 23 (B) (2) Test corrections due Tuesday, Jan. 22 (A) or Wednesday, Jan. 23 (B) (3) Problem Set 5.2