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ACCELERATOR: The ratio between investment expenditures and the change in gross domestic product. This is based on the notion that business investment depends on the rate of growth of aggregate output. If the economy is expanding, in other words, then the business sector invests in more capital goods to produce the extra output needed. This accelerator effect modifies and magnifies the simply multiplier effect based on the induced consumption and the marginal propensity to consume.

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Lesson 10: Utility and Demand | Unit 3: Complex Choices Page: 12 of 21

Topic: Rule Of Consumer Equilibrium <=PAGE BACK | PAGE NEXT=>

  • The rule of consumer equilibrium states that consumers maximize utility by equating the marginal utility obtained from the LAST DOLLAR spent on each good.

  • Another way of stating this rule is through the ratios of marginal utility to price (MU/P).
  • The marginal utility-price ratios for all goods are equal.

  • MU/P for good 1 = MU/P for good 2


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SIMPLE EXPENDITURES MULTIPLIER

A measure of the change in aggregate production caused by changes in an autonomous expenditure that shocks the macroeconomy, when consumption is the ONLY induced expenditure. The simple expenditures multiplier is the inverse of one minus the marginal propensity to consume, or more simply the inverse of the marginal propensity to save. A related multiplier is the simple tax multiplier, which measures the change in aggregate production caused by changes in taxes.

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