When price level is considered, the value of the multiplier will be less than that suggested by the oversimplified version of multiplier. Why?
As long as the aggregate supply curve slopes upward, any increase in aggregate demand will push up the price level. Higher prices, in turn, will drain off some of the higher real demand by eroding the purchasing power of consumer wealth and by reducing net exports. Thus, inflation reduces the value of the multiplier below what is suggested by the oversimplified formula.
You might also like to view...
Which type of demand for money causes the demand for money curve to slope downward?
a. Speculative demand. b. Precautionary demand. c. Transactions demand. d. Foreign-exchange demand.
Why might Congress find it easier to promote full employment than to curb inflation?
If an economy's population grows at 3 percent and income grows at 4 percent, then
a. per capita income is declining b. the economy's standard of living is decreasing c. per capita income is negative d. per capita income is growing e. human capital per capita is increasing
Because business firms often finance new investments with borrowed money, a key determinant of investment spending is
a. tax rates. b. the price level. c. the rate of inflation. d. the real interest rate.