unit 3 part 2 econ

What is the basic aggregate demand function in the private economy?

AD = C + I = c0 + c1Y + I.

What is autonomous investment (a0)?

Investment that does not depend on income or interest rates.

How does a rise in interest rates affect AD?

Higher r → lower I → lower AD.

What happens when investment falls in the multiplier model?

AD decreases, output falls, employment decreases, leading to a new lower equilibrium.

What is the AD function in a closed economy with government?

AD = C + I + G.

What is disposable income?

Yd = (1 – t)Y, where t is the proportional tax rate.

How do taxes affect the multiplier?

Higher t reduces disposable income, making the multiplier smaller.

What is the AD function in an open economy?

AD = C + I + G + NX, where NX = X – M.

What is the marginal propensity to import (m)?

The fraction of additional income spent on imports.

How do imports affect the multiplier?

Higher m reduces the size of the multiplier.

Summary: What reduces the multiplier?

Higher taxes and higher imports.

Summary: What increases the multiplier?

Higher government spending or higher exports.