1.5 Multiplier and the accelerator Flashcards
Define the multiplier
process by which any changes in the components of AD will lead to an even greater change in national output.
What is the formula for the multiplier
1/1-mpc (marginal propensity to consume)
What effect does the multiplier have on AD and equilibrium
Makes any changes in AD more volatile
What is the formula for marginal propensity to consume
change in consumption/change in income
What effect would a high multiplier have on an injection into the circular flow of income
It would increase the amount AD increases via the multiplier effect
What happens to the multiplier effect in the long run as the economy moves to equilibrium
The multiplier becomes diluted
Define the accelerator
changes in investment can be directly linked to GDP growth
Define output gap
the difference between the actual level of real GDP and the full employment level
cause of output gaps
caused by a change in AD in relation to the point of full employment,
consequence of output gaps
inflationary pressure in the short run