Explain on a table the differences between the two macroeconomic multipliers studied in the second part of the course. t
Posted: Mon May 02, 2022 7:54 am
Explain on a table the differences between the two macroeconomic
multipliers studied in the second part of the
course.
the two multiplier are the followings:
The Multiplier Effect
1. When the government buys $20 billion of goods
from Boeing, that purchase has repercussions. The immediate impact
of the higher demand from the government is to raise employment and
profits at Boeing.
2. Then, as the workers see higher earnings and the
firm owners see higher profits, they respond to this increase in
income by raising their own spending on consumer goods. As a
result, the government purchase from Boeing raises the demand for
the products of many other firms in the economy.
3. Because each dollar spent by the government can
raise the aggregate demand for goods and services by more than a
dollar, government purchases are said to have a multiplier effect
on aggregate demand.
4. This multiplier effect continues even after this
first round. When consumer spending rises, the firms that produce
these consumer goods hire more people and experience higher
profits. Higher earnings and profits stimulate consumer spending
once again and so on.
The Money Multiplier
Suppose the borrower from First National uses the $90 to buy
something from someone who then deposits the currency in Second
National Bank. Here is the T-account for Second National Bank:
After the deposit, this bank has liabilities of $90. If Second
National also has a reserve ratio of 10 percent, it keeps assets of
$9 in reserve and makes $81 in loans. In this way, Second National
Bank creates an additional $81 of money. If this $81 is eventually
deposited in Third National Bank, which also has a reserve ratio of
10 percent, this bank keeps $8.10 in reserve and makes $72.90 in
loans. Here is the T-account for Third National Bank:
multipliers studied in the second part of the
course.
the two multiplier are the followings:
The Multiplier Effect
1. When the government buys $20 billion of goods
from Boeing, that purchase has repercussions. The immediate impact
of the higher demand from the government is to raise employment and
profits at Boeing.
2. Then, as the workers see higher earnings and the
firm owners see higher profits, they respond to this increase in
income by raising their own spending on consumer goods. As a
result, the government purchase from Boeing raises the demand for
the products of many other firms in the economy.
3. Because each dollar spent by the government can
raise the aggregate demand for goods and services by more than a
dollar, government purchases are said to have a multiplier effect
on aggregate demand.
4. This multiplier effect continues even after this
first round. When consumer spending rises, the firms that produce
these consumer goods hire more people and experience higher
profits. Higher earnings and profits stimulate consumer spending
once again and so on.
The Money Multiplier
Suppose the borrower from First National uses the $90 to buy
something from someone who then deposits the currency in Second
National Bank. Here is the T-account for Second National Bank:
After the deposit, this bank has liabilities of $90. If Second
National also has a reserve ratio of 10 percent, it keeps assets of
$9 in reserve and makes $81 in loans. In this way, Second National
Bank creates an additional $81 of money. If this $81 is eventually
deposited in Third National Bank, which also has a reserve ratio of
10 percent, this bank keeps $8.10 in reserve and makes $72.90 in
loans. Here is the T-account for Third National Bank: