What is the spending multiplier?
The spending multiplier measures the change in real GDP produced by a change in autonomous expenditures, and is equal to 1/(MPS + MPI). • What is the relationship between the GDP gap and the recessionary gap? The GDP gap is the difference between equilibrium GDP and potential GDP. It tells us the change in real GDP needed to get to potential GDP. The recessionary gap tells us the change in autonomous expenditures that is necessary to close the GDP gap. • How does international trade affect the size of the multiplier? The simple multiplier understates the true multiplier because it does not take into account the foreign repercussions of domestic spending. If Americans spend money on foreign goods, foreign incomes increase. The increase in foreign incomes increases U.S. exports, but the change in exports is not picked up by the simple multiplier. • Why does the aggregate expenditures curve shift with changes in the price level? The aggregate expenditures curve shifts with changes in the
