Shifts in AD : Income and the multiplier

When incomes decrease…

AD will shift to the left

When incomes increase…

AD will shift to the right

Income decrease : Left shift of AD

• Consumption decreases

• investment decreases

• government spending decreases as there is less tax revenue

Income increase : Right shift of AD

• Consumption Increases

• investment increases

• government spending increases as there is more tax revenue

Multiplier effect:

when an initial increase in injections lead to a larger increase in Aggregate demand

Multiplier ratio formulas 3 :

Total change in real GDP / Initial injection , 1/(1-MPC) ,1/MPW

Downward mutiplier effect

when an initial increase in withdrawals shrinks the economy

How do higher benefits increase consumption?

Lower income households have more disposable income to spend in the economy