5 Steps to a 5 AP Macroeconomics 2019

Aggregate Demand and Aggregate Supply ❮ 115

The Multiplier Again

One of the important topics of the previous chapter is the spending multiplier. When a

component of autonomous spending increases by $1, real GDP increases by a magnitude

of the multiplier. The full multiplier effect is only observed if the price level does not

increase,   and this    only    occurs  if   the    economy is   operating  on  the horizontal  range   of   the    

SRAS curve. Figure 9.13 shows the full multiplier effect. (Note that the SRAS curve is

likely a much smoother curve, but the multiplier effect can be illustrated more clearly with

more linear segments.)

But what if the economy is operating in the upward­sloping range of SRAS? Figure 9.14

shows an identical rightward shift in AD. If there were no increase in the price level, the new

equilibrium GDP would be at GDP 1 , but with a rising price level, it is somewhat smaller

at GDP 2. This means that the full multiplier effect is not felt because the rising price level

weakens the impact of increased spending in the macroeconomy.

•    The    multiplier  effect  of   an  increase   in   AD is   greater    if   there  is   no  increase   in   the    price   level.

•    The    multiplier  effect  of   an  increase   in   AD is   smaller    if   there  is   a   larger increase    in   the    

price level.

Figure 9.11

SRAS

Real GDP

Price

Level

GDPf

PL 3

PLf

AD 2

AD 3

LRAS

Figure 9.12

SRAS

Real GDP

Price

Level

GDPf

PLr

PLf

AD AD^1

2

GDPr

LRAS

TIP