Section 3 & 4: The Multiplier Effect

Autonomous Expenditure

Expenditure that does not depend on the level of GDP. This includes planned investment ($I$), government purchases ($G$), net exports ($NX$), and the fixed part of consumption.

Induced Expenditure

The portion of expenditure that does depend on the level of GDP, specifically the part of consumption determined by the MPC multiplied by income

Multiplier Effect

The concept that an initial change in autonomous expenditure (like investment or government spending) leads to a larger eventual change in equilibrium real GDP.

Multiplier Formula

The factor by which an initial change in autonomous expenditure is multiplied to determine the final change in equilibrium GDP.

• $\text{Multiplier} = \frac{1}{(1 - MPC)}$

• Note: The larger the MPC, the larger the multiplier.

Paradox of Thrift

The idea that what appears to be beneficial in the long run (saving more) may be counterproductive in the short run. If everyone saves more, consumption falls, reducing AE, which can trigger a recession.