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Understanding Macroeconomic Policy Multipliers and Effectiveness Factors

Explore the impact of policy choices in an economy using the multiplier concept, real GDP adjustments, and effectiveness factors. Learn about the role of state/local taxes, policy lag, net export effect, and crowding out. Discover how factors like the multiplier and automatic stabilizers influence economic outcomes.

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Understanding Macroeconomic Policy Multipliers and Effectiveness Factors

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  1. LRAS1 Price Level SRAS1 Real GDP AD1 Practice Free Response 1/MPS = 1/.25 = 4 Multiplier ↑ G 5 billion 5 * 4 = ↑ 20 billion R-GDP rises to 120 Billion ↓ Taxes 5 billion 5 * 3 = ↑ 15 billion R-GDP rises to 115 billion (3 Multiplier) ↑ Taxes 5 billion & ↑ G 5 billion R-GDP rises to 105 billion (1 Multiplier) What reduces effectiveness: State/Local Taxes, Policy Lag, Net Export Effect, crowding out What helps effectiveness: Multiplier, Automatic Stabilizers, (unemployment, welfare, progressive tax code)

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