MPCs, multipliers, and our 1st year ECON model

I have been preparing my lecture content for macroeconomics later in the year, and have thought it would be a bit of fun to finish with the following: discuss why the initial marginal propensity to consumer and the final multiplier on any “initial expenditure impulse” need not be related to each other.

This is an issue that I’d cover after discussing Ricardian Equivalence, and think it matters given the increasing relevance of zero-lower bound economics for students in the current environment – and some of the discussion on NBER about multipliers, and HANK vs RANK (heterogeneous vs representative agent models) models of monetary policy.

Note: These non-standard models are cool, and much more “Keynesian” – but I think the more basic description below is important for keeping us humble about our ability to control things.

Now none of this will go into any detail on the more complex models (and ideas of expectations) – it will just ensure that we aren’t “losing money as an asset from our mental model” and should be read as such.

The circular flow (the description ECON141 is all about) describes the flow of funds around the economy, and the key thing is showing that if there is more dollars going around that flow in a period of time there is by definition more nominal activity – be it through higher prices or higher output. This insight can easily get lost in the discussion of individual channels during the course.

Happy with thoughts below – this is likely to be a non-assessed topic for eager students.

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