2.4 National Income

Question 1

What is the multiplier ratio?

Answer 1

Ratio of change in real income to injection that creates change

Question 2

How does the multiplier work?

Answer 2

• An increase in consumption immediately increases AD
• Store owners who have benefitted from the extra consumption now have extra income
• They spend some of that income on goods/services
• Their expenditure on goods/services is now income for the next tier of individuals
• Due to the successive rounds of spending, the final increase in national income is much larger than the initial injection

Question 3

What is the size of the multiplier dependant on?

Answer 3

Size of leakages
- Higher leakage; lower multiplier

Question 4

How does AD shift to an injection with multiplier?

Answer 4

Injection causes AD shift right once
Multiplier causes AD to right again

Question 5

Formula for calculating multiplier

Answer 5

1/1-MPC
1/MPW
1/(MPM+MPS+MPT)