1.5 The Multiplier And The Accelerator Flashcards

1
Q

What is meant by the multiplier ratio

A

This is the ratio of the rise of national income to the initial rise in AD

Number of times a rise in national income is larger than the rise in initial injection of AD

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2
Q

What is meant by the multiplier effect

A

This occurs when there is new demand in an economy

Refers to how an initial increase in AD leads to a bigger increase in national income

It leads to an injection of more income into the circular flow of income

This leads to economic growth and more jobs, higher income and more spending

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3
Q

What is meant by marginal propensity to consume (MPC)

A

The proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.

This higher the MPC, the bigger the size of the multiplier

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4
Q

How can a government impact the MPC

A

They could change the rate of direct tax

More RDI due to lower taxes means propensity to consume might increase

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5
Q

What is meant by average propensity to consume and how is it calculated

A

It is the percentage of income spent rather than saved

Calculated by total consumption divided by total income

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6
Q

What is meant by marginal propensity to save (MPS)

A

It refers to the proportion of a raise in pay that a consumer saves rather than uses for consuming goods and services

MPS + MPC = 1

A high MPS will create a small multiplier

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7
Q

What is meant by average propensity to save and how is it calculated

A

This is the income that is not spent

Calculated by dividing change in savings by change in income

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8
Q

What is meant by marginal propensity to tax (MPT)

A

This is the proportion of each pound taxed by the government

Higher rates of tax mean less RDI for each consumer meaning a smaller multiplier

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9
Q

What is meant by marginal propensity to import (MPM)

A

Consumers spend income on imports rather than domestic goods and services

Therefore income is withdrawn from the circular flow of income

Reducing the size of the multiplier

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10
Q

What is meant by spare capacity in the economy

A

If there is spare capacity or a negative output gap then the multiplier effect on national income will be greater

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11
Q

How do you calculate the size of national income multiplier

A

1/(1-MPC)

1/MPW

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12
Q

How do you calculate marginal propensity to withdraw (MPW)

A

MPW = MPS + MPT + MPM

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13
Q

Explain how shifts in AD impact the multiplier

A

If SRAS is elastic it means the multiplier will be larger

A small increase in AD will lead to a larger increase in national income

If SRAS is inelastic the multiplier effect is likely to be smaller than its potential

This because if AD increases prices will increase meaning higher inflation. This will increase interest rates and encourage saving

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14
Q

What is meant by an output gap

A

This occurs when there is a difference between the actual level of output and the potential level of output

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15
Q

What is meant by a negative output gap

A

This occurs when the actual level of output is less than the potential level of output

This puts pressure on inflation usually meaning unemployment of resources

This means there is spare capacity in the economy

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16
Q

What is meant by a positive output gap

A

This occurs when the actual level of output is greater than the potential level of output

This could be because resources are being used beyond normal capacity

17
Q

How can you illustrate an output gap

A

Negative output gap between Ye and Y1

Positive output gap between Ye and Y2

18
Q

Consequences of an output gap

A

Changes in employment levels

Changes in general price level

Implications for business and consumer confidence. Could impact investment decisions

Changes to levels of national output