Winter 2010 Final 12: If consumption increases by a constant share of short-run output, economic shocks cause larger output fluctuations. See the IS Curve chapter. Multiplier effects. In the basic set-up, consumption is a “constant fraction of potential output”. And this feeds into the IS curve equation to be However, with consumption increasing by a constant fraction of short-run output, , where is between zero and one. When you feed this into the output equation and solve for the IS curve equation, you get With v-bar between zero and one, the term in front exaggerates shocks to a-bar (look up “multiplier”). Meaning shocks are more exaggerated the more consumption responds to shifts in short-run output. TRUE |

Teaching - Curtis Kephart > Econ 100B Intermediate MacroEconomics (Homework and exam examples) > Econ100b Macroeconomics Mid-Term-2 Review >