| Chapter 12. Fiscal Policy and the National Debt#1: Finding the Multiplier
How do we find the multiplier by looking at a graph like the one in Figure 12.1? We need to know three numbers - equilibrium GDP, full-employment GDP, and the size of the inflationary or deflationary gap.
Let's assume that full-employment GDP in Figure 1 is 4,000. Is there an inflationary gap or a deflationary gap - and how large is it?
 <![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif:: ::/sites/dl/free/0072237409/30176/image05.gif','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (17.0K)</a>]]>
Figure 12.1
There is an inflationary gap of 1,500. When equilibrium GDP is greater than full employment GDP, we have an inflationary gap. How is the gap measured? We take the vertical distance between the 45 degree line and the C + I + G + Xn line. Now how much is equilibrium GDP?
It's 6,000, which is where the C = I = G = Xn line crosses the 45 degree line. OK, we're ready to find the multiplier. Just plug in these numbers into this formula and solve:
| Multiplier = | Distance between equilibrium GDP and full-employment GDP | | gap |
| Multiplier = | 6,000 - 4,000 | = | 2,000 | = 1.3 | | 1,500 | 1,500 |
Here's another problem: Using Figure 1, and assuming a full-employment GDP of 10,000, find the multiplier. Begin by determining if there is an inflationary gap or a deflationary gap, and how big it is.
Solution: Because full employment GDP (10,000) is larger than equilibrium GDP (6,000), there is a deflationary gap. Its size is 3,000 (the vertical distance between the C + I + G + Xn line and the 45 degree line).
| Multiplier = | Distance between equilibrium GDP and full-employment GDP | | gap |
| Multiplier = | 4,000 | = 1.3 | | 3,000 |
|
2002 McGraw-Hill Higher Education