Cambridge International as and a level Economics Ebook

The margin and change: 
The multiplier is calculated 
using marginal concepts which can change over time. For 
example, if the government raises the marginal rate of tax, 
the size of the multiplier will fall.
KEY CONCEPT LINK
246
Cambridge International A Level Economics

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SELF-ASSESSMENT TASK 
9.16
In an economy, mps is 0.1, mrt is 0.1 and mpm is 
0.2. GDP is $300 billion. Th
e government raises 
its spending by $66 billion in a bid to close a 
defl ationary gap of $20 billion. Calculate:
a
the value of the multiplier
b
the increase in GDP
c
whether the injection of extra government 
spending is suffi
cient, too high or too low to close 
the defl ationary gap.
Aggregate expenditure
Aggregate expenditure
is the total amount that will be 
spent at diff erent levels of GDP in a given time period. It is 
made up of consumption (
C
), investment (
I
), government 
spending (
G
) and net exports; that is, exports minus 
imports (
X
− 
M
).
Aggregate expenditure: 
the total amount spent in the 
economy at diff erent levels of income.
KEY TERM
While an aggregate demand curve plots total spending 
on the products the economy produces against diff erent 
price levels, an aggregate expenditure curve plots total 
spending against diff erent income levels.
Consumption
Consumption 
or consumer expenditure is spending 
by households on goods and services to satisfy current 
wants, for example, spending on food, clothes, 
travel and entertainment. Th
e main infl uence on 
consumption is the level of disposable income. When 
income rises, total spending also usually rises with 
the rich spending more than the poor. However, while 
total spending rises with income, the proportion of