1.5-The multiplier and the accelerator Flashcards
What is the multiplier effect?
The multiplier effect is the proportional amount of increase in final income that results from an injection of spending.
True or False: The multiplier effect only applies to government spending.
False
Fill in the blank: The formula for the multiplier is 1 / (1 - MPC), where MPC stands for _____.
Marginal Propensity to Consume
What does a higher marginal propensity to consume indicate about the multiplier effect?
A higher marginal propensity to consume indicates a larger multiplier effect.
What is the accelerator effect?
The accelerator effect is the relationship between the level of investment and the rate of change of national income.
True or False: The accelerator effect suggests that an increase in income will lead to a proportionately larger increase in investment.
True
What is the primary factor that drives the accelerator effect?
The primary factor is the changing level of national income.
Multiple Choice: Which of the following increases the size of the multiplier? A) Decrease in taxes, B) Increase in savings, C) Decrease in government spending.
A) Decrease in taxes
What is the relationship between the multiplier effect and the accelerator effect?
The multiplier effect can lead to changes in income that trigger the accelerator effect.
Fill in the blank: The multiplier effect can amplify changes in _____ and _____ in the economy.
income, output
True or False: The multiplier effect operates in both directions: it can amplify increases and decreases in spending.
True
What is the significance of the investment function in the accelerator effect?
The investment function shows how investment levels respond to changes in income.
Multiple Choice: What does a low multiplier suggest about an economy? A) High consumer confidence, B) Low savings rate, C) High leakage from the circular flow.
C) High leakage from the circular flow.
What might cause the multiplier effect to be smaller than expected?
Factors such as high savings rates, taxes, and imports can reduce the multiplier effect.
Fill in the blank: The multiplier effect is often used in fiscal policy to predict the impact of _____ on economic output.
government spending
True or False: The accelerator effect is independent of the multiplier effect.
False
What role do expectations play in the accelerator effect?
Expectations about future income can influence current investment decisions.
Multiple Choice: Which factor does NOT directly affect the multiplier? A) Government spending, B) Consumer confidence, C) Interest rates.
C) Interest rates
What is the key assumption behind the accelerator effect?
The key assumption is that firms will invest based on expected future demand.
Fill in the blank: The multiplier can be affected by the level of _____ within the economy.
leakages
True or False: The multiplier effect can lead to a recession if spending decreases significantly.
True
What is a common measure used to calculate the multiplier effect?
The ratio of change in GDP to the initial change in spending.
Multiple Choice: Which of the following is an example of an injection in the circular flow model? A) Savings, B) Exports, C) Imports.
B) Exports
How does the concept of time lag relate to the accelerator effect?
There can be a time lag between changes in income and the corresponding changes in investment.
