07 - The Multiplier

Question 1

What is the multiplier effect?

Answer 1

An initial increase in injection into the circular flow of income will eventually lead to an even bigger increase in national income

Question 2

What is the multiplier ratio (k)?

Answer 2

It measure the proportionate change in national income in response to a change in injections/withdrawals

K = change in national income / change in injections and withdrawals

Question 3

What are the positive and negative multipliers?

Answer 3

Positive - When an initial increase in injection (or decrease in withdrawal) leads to a greater final increase in real GDP

Negative - When an initial decrease in injection (or increase in withdrawal)leads to a greater final decrease in GDP

Question 4

What is MPC,MPS, MPT, MPM, MPW? (Marginal propensity)?

Answer 4

MPC - The proportion of one additional unit that is spent of domestic goods and services

MPS - The proportion of one additional unit of income that is saved

MPT - The proportion of one additional unit of income that is taxed

MPM - The proportion of one additional unit of income that is spent on imports

MPW - The proportion of one additional unit that is saved, taxed, spent on imports (MPS + MPT + MPM)

Question 5

How does multiplier effect vary?

Answer 5

Size and structure of economy
Spare capacity
Marginal propensity to save
Openness of economy to international trade