1.5 Multiplier and the accelerator

Question 1

Define the multiplier

Answer 1

process by which any changes in the components of AD will lead to an even greater change in national output.

Question 2

What is the formula for the multiplier

Answer 2

1/1-mpc (marginal propensity to consume)

Question 3

What effect does the multiplier have on AD and equilibrium

Answer 3

Makes any changes in AD more volatile

Question 4

What is the formula for marginal propensity to consume

Answer 4

change in consumption/change in income

Question 5

What effect would a high multiplier have on an injection into the circular flow of income

Answer 5

It would increase the amount AD increases via the multiplier effect

Question 6

What happens to the multiplier effect in the long run as the economy moves to equilibrium

Answer 6

The multiplier becomes diluted

Question 7

Define the accelerator

Answer 7

changes in investment can be directly linked to GDP growth

Question 8

Define output gap

Answer 8

the difference between the actual level of real GDP and the full employment level

Question 9

cause of output gaps

Answer 9

caused by a change in AD in relation to the point of full employment,

Question 10

consequence of output gaps

Answer 10

inflationary pressure in the short run