MOD-2.B—a. Define the expenditure multiplier, the tax multiplier, the marginal propensity to consume, and the marginal propensity to save.…

a. Define the expenditure multiplier, the tax multiplier, the marginal propensity to consume, and the marginal propensity to save. b. Explain how changes in spending and taxes lead to changes in real GDP. c. Calculate how changes in spending and taxes lead to changes in real GDP.

• A $1 change to autonomous expenditures leads to further changes in total expenditures and total output.
• The expenditure multiplier quantifies the size of the change in aggregate demand as a result of a change in any of the components of aggregate demand.
• The tax multiplier quantifies the size of the change in aggregate demand as a result of a change in taxes.
• The expenditure multiplier and tax multiplier depend on the marginal propensity to consume.
• The marginal propensity to consume is the change in consumer spending divided by the change in disposable income. The sum of the marginal propensity to consume and marginal propensity to save is equal to one.
• Enduring understanding MOD-2: Economists use the aggregate demand–aggregate supply model to represent the relationship between the price level and aggregate output in an economy and to illustrate how output, employment, and the price level respond to macroeconomic shocks.