1.5 The multiplier and the accelerator (wip)

Question 1

What is the multiplier effect?

Answer 1

When an injection in the economy has a larger total overall impact on GDP than its initial sum.

Question 2

Why does the multiplier effect occur?

Answer 2

The multiplier effect occurs when there is a injection into the economy. This leads to economic growth leading to more jobs and wages and hence even more income being created.

Question 3

What are the factors impacting the multiplier effect?

Answer 3

• Marginal propensity to consume
• Marginal propensity to save
• Marginal propensity to import
• Marginal propensity to tax
• Spare capacity in the economy

Question 4

How is the multiplier effect’s total effect calculated?

Answer 4

1/(1-MPC)

For example if a consumer spends 0.6 of every 1 pound they spend they save 0.4. Therefore the multiplier will be 1/(1-0.6)=2.5

This means that every £1 of income generates £2.50 of new income.

Question 5

What is the accelerator effect?

Answer 5

An increase in GDP will lead to a proportionately higher rise in capital investment.

Question 6

When does an output gap occur?

Answer 6

An output gap occurs when there is a difference between actual level of output and the potential level of output.

Question 7

What is the impact of a negative output gap?

Answer 7

This means there is lots of spare capacity within the economy as not all resources and labour is being utilized to its full potential. This puts downward pressure on inflation.

Question 8

What are the impacts of a positive output gap?

Answer 8

This means productivity is very high leading to economic growth, putting upwards pressure on inflation.

Question 9

What is a negative output gap?

Answer 9

When the actual level of output is less than the potential level of output.

Question 10

What is a positive output gap?

Answer 10

When the actual level of output is higher than the potential level of output.