Chapter 9: Aggregate Demand and Aggregate supply

Aggregate supply and equilibrium in

the Keynesian model.
 The Keynesian Multiplier (HL)
• MULTIPLIER:
• Final increase in real GDP will most likely be
greater than the initial increase in expenditure
Multiplier = Change in RGDP
Initial change in expenditure
Initial change in expenditure = change in real GDP*
Multiplier
As a rule, the multiplier > 1.
Change in real GDP> initial change in expenditure.
• Multiplier is attributed to J.M.Keynes.
• It is often referred to as the “Keynesian
Multiplier”.
• Whenever there is a change in a component
of AD- there is likely to be a multiplied effect
on real GDP.
• It is important for policy makers who often try
to influence the level of AD in order to affect
the level of real GDP and unemployment.
Understanding the multiplier in terms of
leakages and injections
• The larger the MPC,
smaller the value of
the denominator of the
first fraction, greater is
the multiplier.
• Smaller the S or T or M,
Larger will be the size
of the multiplier.
Calculating the multiplier and its effects
on real GDP
The multiplier, aggregate demand
and real GDP
The effect of the multiplier in relation to
the price level