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So now lets look at a numerical example.
Assuming the government increases G by 10 million
by building a polyclinic.
And we assume MPC = 0.5.
So since K = 1/(MPW), K = 2.
Again, these are all assumptions.
You can choose what number you want
as long as they are realistic.
So when the government pays out 10 million to construction firms
to build a polyclinic,
these construction firms will then pay out wages
to workers who will then spend a portion of their income.
Firms which receive this money
will then reinvest this money
as well as pay out wages and so the cycle continues.
At each stage a portion of the initial injection
leaks out because MPC is less than 1.
People save some of the money,
they are taxed etc.
The process will stop when
the total withdrawls = the initial injection into the economy.
So the initial injection of 10 million into the economy
produces a net increase of 20 million,
i.e. k x injection.
So now lets look at this from the perspective of AD-AS.
So the government injects 10 million into the economy
by building a polyclinic,
this produces an increase in AD,
however this will further cause a further increase in AD
as the next round continues.
However at each time the increase in AD is less than previously.