2.4.1-3 The Multiplier

Question 1

Define the Multiplier

Answer 1

Measures the number of times higher the final change in GDP is than the original inflation.

Question 2

What is the formula for the multiplier?

Answer 2

1 / 1 - MPC x Injections

Question 3

Define marginal propensity to consume (MPC) ?

Answer 3

The proportion of extra income that is spent e.g. if i get an extra £100 and spend £80 then the MPC is 0.8

Question 4

Define marginal propensity to save (MPS) ?

Answer 4

The proportion of extra income that is saved e.g if i get an extra £100 and spend £80 then the MPS is 0.2

Question 5

What is the value of the multiplier when the MPC is 0.9?

Answer 5

1/0.1 = 10

Question 6

What happens to the multiplier if the MPS increases?

Answer 6

As the MPS increases, the value of the multiplier will be less and less each time as less money is being spent.

Question 7

If the value of the injection is £50 million and the MPC is 0.8 then what is the final output?

Answer 7

5 x 50 million = £250 million

Question 8

Name 3 criticisms of the theory of the multiplier

Answer 8

1) It. doesn’t take the effect of investment into account with the injections. Would the final value be different if they included the money spent in investment.
2) It doesn’t account for the time lags. It takes time for an injection to have an effect on the economy and in this time there could be other factors that affect consumption.
3) The MPC is not constant and changes over time meaning that the final value of the multiplier is constantly changing and therefore not entirely accurate.