The Multiplier Model and Business Cycles in Economics

Multiplier Model

Determines income changes from spending decisions.

Aggregate Demand

Total demand in the economy, AD = C + I.

Co

Autonomous consumption

C1

Marginal Propensity to consume (MPC)

Consumption Function

C = c0 + c1Y; relationship between consumption and income.

Equilibrium Determination Formula

1/1-C1 X (Co + I)

Marginal Propensity to Consume (MPC)

Change in consumption from change in income.

Autonomous Consumption

Consumption independent of current income levels.

Equilibrium Income

Income level where AD equals output.

45-Degree Line

Graphical representation where output equals AD.

Multiplier Effect

The multiplier effect refers to the process by which an initial change in aggregate demand (AD) leads to a larger overall change in national income (GDP) due to repeated rounds of spending and re-spending in the economy.

Investment (I)

Expenditure on capital goods, assumed constant for now.

Temporary Income Shock

Short-term income change affecting consumption patterns.

Business Cycles

Fluctuations in economic activity over time.

Recession

Negative GDP growth below average trend.

Recovery

Positive GDP growth following a recession.

Expansion

Positive GDP growth above average trend.

Contraction

Negative GDP growth after an expansion.

Factors of Production

Inputs used to produce goods and services.

Income (Y)

Total earnings from production in the economy.

Consumption (C)

Total spending by households on goods and services.

Investment Demand

Firms' desire to purchase capital goods.

Fiscal Stimulus

Government spending to boost economic activity.

Adjustment Mechanisms

Processes returning economy to trend after shocks.

Consumer Confidence

Expectations affecting autonomous consumption levels.

Income Determination

Process of establishing income levels in the economy.

Aggregate Labor/Product Model

Framework for understanding medium-run income determination.

Negative Income Shock

Sudden drop in income affecting consumption negatively.

Expected Income

Anticipated income influencing consumption behavior.

Equilibrium in Diagrams

Graphical representation of income and AD balance.

Changes in MPC

Variations in consumer behavior affecting overall consumption.