Equilibrium levels of real national output
(aggregate demand and supply)
“If you’re not confused, you’re not paying attention”
Anon
https://www.youtube.com/watch?v=VVp8UGjECt4&index=1&list=PLFEF36C1CCC20FF05
Unit content
Students should be able to:
 Explain the concept of equilibrium real national
output
 Use AD/AS diagrams to show how shifts in AD or
AS cause changes in the equilibrium price level and
real national output
 Define the multiplier ratio and the multiplier process
 Apply the marginal propensities and their effects on
the multiplier (MPC, MPS, MPT and MPM)
 Use the formula 1/(1 – MPC) and 1/MPW where
MPW = MPS + MPT + MPM
 Apply the multiplier to shifts in AD
 Assess the effects of the multiplier on the economy
Macroeconomic equilibrium: sketch a diagram
showing the interaction of SRAS and AD
The graph shows
the
macroeconomic
equilibrium where
AD = AS at price
level ___ and real
output ___
When does equilibrium occur?
Macroeconomic equilibrium at full employment
Sketch the Keynesian LRAS
Mark on AD at full employment when all factors of
production are fully employed.
What would happen if firms tried to increase
output?
Mark on AD below full employment level, what
does this mean for the economy?
What does this diagram show?
The multiplier example
If the government increased spending by £1 billion
on the NHS (e.g. building more A&E centres) this
would lead to more income for households: why?
What would these workers do with this extra money
What would that lead to?
So, the original government expenditure sparked off
further spending causing a multiplier effect.
If an increase in investment leads to a bigger increase
in national income this is called the multiplier.
The multiplier definition
The multiplier is the ratio of a change in
equilibrium real income to the autonomous
change that brought it about.
You may need to calculate the multiplier:
Multiplier =
1
1 −𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑝𝑒𝑛𝑠𝑖𝑡𝑦 𝑡𝑜 𝑐𝑜𝑛𝑠𝑢𝑚𝑒
E.g. if the MPC is 0.5 what is the multiplier? What
will be the impact for every £100 million injection
into the circular flow?
What does the size of the multiplier depend on?
 the size of leakages (withdrawals) e.g. how
much is ______ by households, how much is
spent on ________, how much is lost in ______
to the government.
 the size of withdrawals also depends on
domestic elasticity of supply – if domestic supply
is inelastic then it will not be able to meet an
increase in demand and so more imports will be
bought hence diluting the multiplier effect.
Injections have a multiplier effect and they can be
from the g___________, from investment (f_____)
and/or from e_________
Examples of multipliers – what will happen if:
 What is the AD formula?
For the following questions decide if the multiplier
will increase or decrease then state which part of
the AD formula is changing
 Savings increase?
Multiplier will __________ since ___ decreases
 More imports are purchased?
Multiplier will __________ since ___ increases
 Income tax increases?
Multiplier will __________ since ___ decreases
The multiplier and shifts in AD
 An injection will have a multiplier effect and so
the initial shift to the right of the AD curve will
then lead to further shifts.
 Similarly a withdrawal will have a multiplier effect
in the opposite direction and cause multiple
leftward shifts of the AD curve.
 Sketch this:
Evaluating the multiplier
This will depend on the case study but you could
include:
 Difficulty in measuring it
 Time it takes to come into full effect
 Size of leakages
 Elasticity of supply
Tricky question: is an increase in exports good for an
economy?
HINT: sketch the Keynesian LRAS with shifting AD
curves
Video on multiplier and fiscal policy
1. What is fiscal policy?
2. What are the components of aggregate
demand?
3. Draw the diagram from the video
4. What is the Phillips curve?
5. What is the multiplier effect?
6. Explain his example about £10billion.
Summary poster
1. Marginal propensities and their effects on the
multiplier:
 the marginal propensity to consume (MPC)
 the marginal propensity to save (MPS)
 the marginal propensity to tax (MPT)
 the marginal propensity to import (MPM)
2. Formulae 1/(1-MPC) and 1/MPW, where
MPW=MPS+MPT+MPM