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Macroeconomics 6/c/e
Macroeconomics, 6/e
Rudi Dornbusch, Massachusetts Institute of Technology
Stanley Fischer, International Monetary Fund, on leave from MIT
Richard Startz, University of Washington
Frank Atkins, University of Calgary
Gordon Sparks, Queen's University
Income and Spending

Chapter Objectives

After reading and studying this chapter, you should be able to:

Understand that in the most basic model of aggregate demand, spending determines output and income, but output and income also determine spending. In particular, consumption depends on income, but increased consumption increases aggregate demand and, therefore, output.

Understand that increases in autonomous spending increase output more than one for one. In other words, there is a multiplier effect.

Understand that the size of the multiplier depends on the marginal propensity to consume and on tax rates.

Understand that increases in government spending increase aggregate demand and, therefore, tax collections. However, tax collections rise by less than the increase in government spending, so increased government spending increases the budget deficit.




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