
LAFFER CURVE: The graphical invertedU relation between tax rates and total tax collections by government. Developed by economist Arthur Laffer, the Laffer curve formed a key theoretical foundation for supplyside economics of President Reagan during the 1980s. It is based on the notion that government collects zero revenue if the tax rate is 0% and if the tax rate is 100%. At a 100% tax rate no one has the incentive to work, produce, and earn income, so there is no income to tax. As such, the optimum tax rate, in which government revenue is maximized, lies somewhere between 0% and 100%. This generates a curve shaped like and inverted U, rising from zero to a peak, then falling back to zero. If the economy is operating to the right of the peak, then government revenue can be increased by decreasing the tax rate. This was used to justify supplyside economic policies during the Reagan Administration, especially the Economic Recovery Tax Act of 1981 (KempRoth Act).
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EXPENDITURES MULTIPLIER: A measure of the change in aggregate production caused by changes in an autonomous expenditure. The expenditures multiplier is the inverse of one minus the slope of the aggregate expenditures line. The simple expenditures multiplier includes ONLY induced consumption. More complex expenditures multipliers include other induced components. Two related multipliers are the tax multiplier, which measures the change in aggregate production caused by changes in taxes, and the balancedbudget multiplier which measures the change in aggregate production from equal changes in both taxes and government purchases. The expenditures multiplier measures the change in aggregate production triggered by changes an autonomous expenditure, including consumption expenditures, investment expenditures, government purchases, or net exports. The expenditures multiplier captures the consequences of a shift in the aggregate expenditures line in a single measure, a measure that is generally greater than one. The expenditures multiplier is actually a family of multipliers that differ based on which components of the Keynesian model are assumed to be induced by aggregate production and income. The simple expenditures multiplier, as the name suggestions, is the simplest variation and includes only induced consumption. Every other component  investment expenditures, government purchases, taxes, exports, and imports  are assumed to be autonomous. More complex expenditures multipliers include different combinations of induced components, ranging all of the way up to the "complete" expenditures multiplier that realistically includes all induced components. Induced consumption, investment, and government purchases all increase the value of the expenditures multiplier. Induced taxes and imports both decrease the value of the expenditures multiplier. The Simple Expenditures MultiplierThe simple expenditures multiplier is the ratio of the change in aggregate production to an autonomous change in an aggregate expenditure when consumption is the only induced expenditure. This multiplier is as simple as it gets while capturing the fundamentals of the multiplier. Autonomous investment triggers the multiplier process and induced consumption provides the cumulatively reinforcing interaction between consumption, aggregate production, factor payments, and income.The formula for this simple expenditures multiplier, m, is: Where MPC is the marginal propensity to consume and MPS is the marginal propensity to save.If, for example, the MPC is 0.75 (and the MPS is 0.25), then an autonomous $1 trillion change in investment expenditures results in a change in aggregate production of $4 trillion. While the simple expenditures multiplier can be derived from the basic twosector Keynesian multiplier, it also works for models with more sectors, as long as consumption is the only induced expenditure. If, for example, autonomous government purchases change by $1 trillion, then the change in aggregate production is $4 trillion, the same as with a $1 trillion change in investment expenditures. Moreover, the same change in aggregate production is realized if autonomous exports or consumption expenditures change by $1 trillion. More Complex Expenditures MultipliersThe simple expenditures multiplier assumes that consumption is the only induced component. In the real world, however, consumption is not the only induced expenditure. Investment, government purchases, taxes, and net exports (through imports) are also induced. A more complete, more realistic, and more complex multiplier includes induced components.Here is the formula for just such a multiplier, which can be labeled m[all]. m[all]  =  1 {1  [MPC + MPI + MPG  (MPC x MPT)  MPM]} 
This particular multiplier has a number of abbreviations containing the letters "MP." These are the assorted induced components, with "MP" standing for marginal propensity. In fact, the batch of abbreviations within the brackets "[]" is actually the slope of the aggregate expenditures line.Let's run through the cast of characters in this formula. This complex expenditures multiplier can be used to determine the change in aggregate production resulting from a change in any autonomous expenditure, including consumption, investment, government purchases, and net exports.This particular expenditures multiplier formulation includes all induced components. However, several other expenditures multipliers that include different combinations of these induced components can be identified. One multiplier can include only induced consumption and induced government purchases. Another can include induced consumption, induced investment, and induced imports. The possibilities are almost endless. Other MultipliersThe expenditures multiplier is one of several Keynesian multipliers. Two other related multipliers are tax multiplier and balancedbudget multiplier. Tax Multiplier: The tax multiplier measures changes in aggregate production caused by changes in taxes. Like the expenditures multiplier this comes in several varieties, simple and complex, depending on which expenditures and other components are induced by aggregate production and income. It differs from the expenditures multiplier in that aggregate expenditures change by less than the change in taxes.
 BalancedBudget Multiplier: The balancedbudget multiplier measures the combined impact on aggregate production of equal changes in government purchases and taxes. The balancedbudget multiplier has a value equal to one.
Two other multipliers arise from the financial, or money, side of the economy. They are the deposit expansion multiplier and the money multiplier. The deposit expansion multiplier measures the change in bank deposits caused by a change in bank reserves. The money multiplier measures the change in money caused by a change in bank reserves. Both are useful in the analysis of monetary policy.
Recommended Citation:EXPENDITURES MULTIPLIER, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 20002024. [Accessed: May 27, 2024]. Check Out These Related Terms...           Or For A Little Background...                And For Further Study...     
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