‘Aceecnre Expenorrune In the basic circular flow model, aggregate expenditure (AE) i ‘expressed through thi simple form ‘A= Consumption + Investment + Goverment expenditure Aggregate expenditure in the economy tansates to national or segregate income (V). In other words, in a simple economy, national Income reflect the vahe ofthe expenditires of consumers firm, and {he government where: Ya national acne Cis consumption {is investment Gis goverment expenditure [wit the gven formula, does a peso change in consumption result Jina peso change inthe aggregate income? No, wil be greater becaise ofthe multpier effect The multiplier effect is an important concept ‘because it hash Impact on the aggregate demand, the output of the conan, and the national nce Muvripusn Errecr “The multiple fle isthe ratio ofthe changes inthe equi level of output to change in exogenous variables, Exogenous variables fare independent varabes that come from outside the economle model (AE C++ 6), Examples are come that affects consumption (C) and fonts of productive resources that allt investment). The changes in these emgenous variables cause the equim level of income of ‘utp to change by a certain amount (null) ‘he multi ecomputed a fallow 1 MPS * PS tee: mi wiper PC i marginal propensity to consume MPS is marginal propensity to save Going back to the other simple model of the economy, the relationship can be expressed a: prec+s, were: DY i disposable income Cincxomaation Sis vines Am increase in sncome causes changes in consumption. These change aflect the aggregate expenditure and uitimately, the national Income, The change in consumption brought about by change {in income’ called the marginal propensity €2 consume (MPC. Mathematically, i canbe expressed a ‘The marginal propensity to consume hasan effect on the the higher the MPC, the bigge the mlpir (provided that ‘The muliplir is also useful when the income is used not fr spending but rather for savings. Sinoe DY = C+ 5, i can be assumed that an increase in come may cause some adjustment in savings. ‘The peso change in savings given a peso change in income i called the ‘marginal propenity to save (MPS) ns expressed inthis formula: vues = Stange ia ‘hangin BY Since savings can be expressed az S = DY C, the marginal propensity to sae MPS=1- MPC ‘Tas based on thie formule, the multiplier when income is saved 1 ee ee a ‘This means thatthe higher the marginal propensity to sare, the lower the muller (he MPS should nat be lower than .01 oF 1) In imple economy, a lowe multiplier could translate toa lower national For example, given a change in Cathy disposable income equal to 100,000, she sides to save 20,000 ofthat extra income. How much ‘il he ruler be?Sotton: Since DY = C'S the valu of canbe derived through: {© = 100,000 -¥20,000, c= 80,000 ‘The reeling amount for consumption is then used to ove for the marginal propensity to consume. ec = —ciungeinc hangin DY _ 180000 ‘100,00 de MPCs 0.8, the multe wil then be: os ‘To further iustrate the eect ofthe multiplier on the equlibeurn evel income, the consumption function C= a* BY and the equilibrium ‘ndtion AE = Cina simple economy wil be used. In this case, a simple ‘conomy is characterized by not having any investment and government Defining the variables: (C= total coneumption Y + tneome ‘+ initia consumption or consumption If income Se zero fiom the previous section, ti assumed to be P80,000, bb = MPC which i 0.8 rom the previous example “The connumption function is exressed as: c= P80000+ 087 ‘Since the equilrium level of income ¥ is AE, the equilibrium ‘condition ean be expressed as Y= C in «simple economy where only consumption is assumed to have en eect on the national income, Subettating the vale f consumption in the equilibrium condition: "r= roan» O87 Yost = #20900 oay = Peco 50000 oa 1 = rion900 ve ‘With an inti consumption of P80,000, the national income has increased to F400,000 or five tes the intial amount of consumption. ‘The valu ofthe mliper fom the previous section i fv. ‘Graphing the consumption function (Figure. 6.1, the initial consumption sat P3000, This manne that even ifthe income Is zero, ‘here wil tll be consumption spending. The 45-degre line shows the ‘uli level of eome ina simple economy. Fire Consumption and income e Taste acme smo sane santo vee) nvestment can then be introduced in the simple economy. The {nial consumption lve of P80,000 wil stl be used. The effect ofthe vRuntpler on the equilirium level of income must be determined when Ttwestment in the amount of P20,000 is included inthe analysis. The fnvestment spending is autonomous, which means that its not aflectetby the changes inthe national output. Nevertheless, a change in the ‘avestment spending wil have multiplier fleet om the auger Income Te solve forthe equim income, the flowing sqution f yeoe Ye asprer ‘y= 780,000 + o.8y + 920,000 Y-0a¥ = P80,000 + 720,000 02¥ - F100,000 02 Y= P500,000 ith he gen imetment seni 920,00 added t the pevous ode! ofthe simple economy, the equ il af incon ha Ineresed fe ines poy (Graphing the simple economy with investment spending of P2000, the new level of equlieim income becomes #800,000 (Figure 6.) Fes 2 Consumption vezment and come 2sne00 ye comet) 5 ‘woieo mnpoo sik wnt spon aso Tanke rane) ‘Nexis introducing goverment spending in the amount of 25,000 ‘sing the mode of the imple ecomony inthe previous scion, contributing to the a ‘The allowing figures are used in computing: = P90,000 ¥ = 80,000 + oy #'720,000 + ¥25,000 02 = ¥125,000 ¥ = 1625,000 ‘OF COraphing the midel of the economy with the government sector rege income, the new level of equilibrium {come becomes PE2S,000. The addition of government spending in the Segrogate expenditure has inreased the aggveyate Income five ties teutiptien comentin gure 63. Consetonveinent, Gonna pends, and nome omeLastly, net exports wil be presented fm the model. But instead of ‘computing or the aggregate income, the val of exports wil be dered, Fgwe 64 const imsmere, Goverment, an Fllémployment Teak sano sone wneso seme ata ene rane) Fee 64 ities the simple conomy wih, conumption favestment, government expenditure, and aggregate income at fall employment. There is now an exiting “pnp” between the last equim (2 C1) andthe apgrepne ince tall enployment Net exports (X-M) will be included in the equation. rene ox ‘To compute for exports the flowing figures are wed ‘2 = P80.000 » = 08 rc) 1» ¥20,000 @ = 725,000 M = 720,000 ¥ = 700,000 Y= c+t++C-m) Y= asbr+G+a-M 17700,000 = 80,00 » 0.8 (700,00) + 20,000 + 925,000, +x P20,000 £700,000 = PB0,000 + #560,000 + 920,000 + P28,000 + x -P20,000 {700,000 - #80,000 ~P560,000 ~720,000 25,000 + ¥20,000 ~ x ‘Te check the answer Y= Ce1+a+ (em) Ys abbr +G4X-M "Y= mB0,000 + .8Y + 20,000 + 25,000 + P35,000 20,000, 140,000 act = P7000 y DecReasine CONSUMPTION “The following example sa variation ofthe previous one with savings 50% ‘Given change in Marys dispoasbe income (DY] equal o 100,000, she decides to sure 50,000 of that extn income. What wil the rmulpir be? Since DY = C+ §, the valve of C can be computed as follows: c=DY-8 c=1100,000- "50,000 + c= 80,000 ‘The resulting amount for consumption will now lead to the computation for the marginal propenaly to consume. ‘Change in © ‘Chase in DY 50,000 100.000 mirc =MPCs 0, the mubipier wil then be Mager = ‘urteritustrated i the etet ofthe malities on the equilibrium level of income. The consumption function C= a+ bY and the ‘equilibrium condition AE ~ C in a simple economy without investment And government pending are sed. Defining the variates C= total consumption Y= income 1 lea consumption or consumption i income is zero; from the previous section, 8 assumed Io be 0,000 1b = MPC or marginal propensity to consume, whichis 0 ence, the consuniption function is expressed as; c= P50000+ 05 ‘Since the equilibrium level f income ¥ ie A, the equilibrium andtion can also be expressed as Y = C in a simpie economy where nly consumption is assumed to have an eft on the national income Subattting the value of consumption in he emul condition: ¥ = 50000+05" Y-05¥ = P50,000 0.5y = 750,000 150,000 ¥ = 100,000 ‘With an intial consumption of P50,000, the incame increased. to 100,000 or two tines the inital amount of constimption. The value reflects the multiplier which ie 2 Increasing savings while decreasing consumption has significant fl The scenario results ina decline inthe mlpir from 5 to 2 Te means that it io beter for the economy ta increase spending to experience a multiplier elect After graphing the consumption function (Figure 6.9), ican be seen ‘thatthe initial consumpeon le P5000. It means that even fhe nore 's sero, there wil sil be consumption spending. The 45-degre line shows the equllriam lvl oF income in simple economy igure 45 conmpin adincome Tvestment will now be intdiced in the simple economy. The {nil consumption level of P50,000 wil stil be used. The eet of the ‘lipier on the equlliium level of income willbe determined when {ivestment in the amount of 750,000 ia included in the analysis. Tvestinent spending autonomous ts nt allected by the changes in ‘change i this investment spending, Income, the equation below ie used: yen Ys avuel Y= 750,000 + oY + 50,000 1y=03Y = 50,000 + 750,000 sy = 100,000 100,000 05: y= ip200,000 With the investment spending of P50,000 added to the previous ‘motel the equim level of come increased twice ull of 2. Figure 6.6 is a graph of the simple economy with investment spending, The level of equlirium income now becomes P200,000.‘rniwe wena ‘Again, using the model of the simple economy in the previous section, government spending inthe amount of P25,000 ‘wil be introduced ‘The aggregate income will be computed using these glen figures; {4 = 750,000 initia consumption » = os mr 1 50,000 imestment = 725,000 government spending yecstso Yearbrsieg Y = P50,000 + 0.5¥ + #50,000 + 25,000 Y-asy = 125,000 oy = ¥125,000 125,000 = y= T5000 ¥ = 7250,000 After graphing the model of the economy (Figure 67) with the imvernment sector contributing tothe aggregate income, the new level teulrim name becomes 250 00. Te increaue Inthe aggegte ‘expenditure with government spending has inereased the eggregate Income two times lip). Figure 67 Consurton, nese, Government Exper and income ronan vanes aN Comparing the two scenarios, changing MPS from 20% to 50% ‘makes the economy grow smaller in terms ofthe aggregate income and the muller elfec Though it is true thats higher consumption leads toa higher aggregate income, the highest it can go inst 99%. Once it ‘becomes 100%, there wil be no multiplier eet. The economy will only get the same aggregate income from consumption, investment, and fvernment expenditure without adding or multpying anything ‘To prove the aforementioned, the allowing equations can be solved. MPC = 100% oF 1 then, Mutipter = tae stipes = 2 or undefined 1+MPS = 1 MPs = 0 Mo=as by and Y= then Yat by ‘Replacing the values fo simple economy wih no multiplier Y = 100,000 + MPC ¥ Y= M100,000 + 0 ¥ = "100,000Flgwre 3. Consumpson and come, th mutiper +0 rinse mee Figure 6.8 shows a simple economy with no multiplier effector 2er0 rultiplies. tn other words every money ls spent where the change in disposable income is equal tothe change in consumption, then what ‘is consumed is what the economy gets in aggreente income with zero Saas ‘To increase the value of the multiple, isi better to save oF to + Buyers can consume resources without competing payments or them. I is calle inital consumption from the Keynesian theory of constizption, * Aggregate expenditures in the economy translate to national of ‘aggregate income. In a simple economy, national income reflect the value ofthe expenditures of consumer, fs, and the government. + The multiplier effect isthe ratio of the changes i the equiibriam level of output to changes in exogenous variables, + The change in consumption brought about by a change in income is called the marginal propensity to consume (MPC). ‘+ The marginal propensity to consume as an effect on the multiplier: the higher the MFC, the bigger the multiplier (provided that the MPC doesnot exceed 099 or 99% + -Appeso change in savings given @ peso change in income fs called the marginal propensity to save (MPS). + A higher marginal propensity to save translates to a lower ‘multiplier. The MPS should not be lower than 0.0 or 1% + Ina simple economy, a low multiplier implies alow national income, + The 45.degrec line shows the equllbrium level of income in simple sconomy.GQ sexrwones Name: Year and Section: ‘Sear Date: “Anawes the questions briefly bated on your understanding ofthe preceding lesson. 1. Compute for the multiplier if savings is P20,000 and DY is 200,000. 2, How can the economy gain additional disposable income? 3, Given: MPS = 50% y = 7200,000 1 = 30,000 «= 50,000 a, Solve for Y= C and graph the solution. 1, Solve for Y= C+ Land graph the sation, ©. Solve for Y= +1 + G and graph the solution. ow will the government increase its spending if taxes are insufficent? Is it betier to borrow money from a bank to start a new business or to save until a person reaches the point where hhe/sbe can start one? Explain you answer.10. Can the usual disposeble income bring the economy to a bigger aggregate income? Explain your answer. Discuss the effect of eaving more after getting additional disposable income. Leo 13th month pay this year will be taxtree up to 82,000. What will be the effect of this? Explain your What might be the effect ofthe situation in item 8 on the tax revenue ofthe government? ‘What might be the effect of the situation in item 8 on the MPS and MPC? @ server Name: Sore ‘Year and Section: Date On the blank before the number, write “True” if the statement is correct and "Fase” it incorrect. ‘Too much importation will decrease the GDP. ‘Buying a car isa form of investment. Buying a condominium unit isa form of consumption. Buying grocery items not for personal use but for inventory ina form of investment. Buying durables make them investments. 6. Loans made by private individuals from SSS and GSIS are considered government spending, Full employment is subjective; itis not 100%. 8. Buying jewelry for personal use is a form of 9, Having your own business isan investment. 10. Monthly disposable income is the same as a change in Dy.