2.4.4 Multiplier

Question 1

What is the multiplier ratio?

Answer 1

The multiplier ratio is the ratio of change in real income to the injection that created the change. eg. If the UK government injected an additional £5m into the economy through government spending and it resulted in an increase in real income of £15m, the value of the multiplier would be 3.

Question 2

What is the multiplier process based on?

Answer 2

The multiplier process is based on the idea that one individual’s spending is another individual’s income. 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.

Question 3

What does an initial injection shifts AD to the right?

Answer 3

The initial injection shifts AD to the right. The result of the multiplier process is that there is then a secondary movement of AD to the right which (if the multiplier were 2) may be double the initial movement.

Question 4

What is the marginal propensities?

Answer 4

The ‘marginal propensities’ refer to the proportion of the next $ earned that a consumer saves, consumes, is taxed, or purchases imports with.

Question 5

What is marginal propensity to consume (MPC)?

Answer 5

The proportion of additional income that is spent.

Question 6

How is MPC calculated?

Answer 6

% change in income

Question 7

What is marginal propensity to save (MPS)?

Answer 7

The proportion of additional income that is saved.

Question 8

How is MPS calculated?

Answer 8

% change in income

Question 9

What is marginal propensity to tax (MPT)?

Answer 9

The proportion of additional income that is paid in tax.

Question 10

How is MPT calculated?

Answer 10

% change in income

Question 11

What is marginal propensity to import (MPM)?

Answer 11

% change in income

Question 12

How can the multiplier be calculated?

Answer 12

The value of the multiplier can be calculated one of two ways
/By focusing on the marginal propensity to consume (MPC)
/By focusing on the withdrawals that occur on each additional $ of income (MPS + MPT + MPM)

Question 13

Calculation for multiplier focusing on MPC?

Answer 13

(1-MPC)

Question 14

Calculation for multiplier focusing on the withdrawals?

Answer 14

MPW

Question 15

What does MPW consist of?

Answer 15

/MPM
/MPS
/MPT

Question 16

What is the relationships between withdrawals and the multiplier?

Answer 16

The greater the withdrawals, the smaller the value of the multiplier - and vice versa.

Question 17

What is the relationships between MPC and the multiplier?

Answer 17

The greater the MPC, the greater the value of the multiplier - and vice versa.

Question 18

What is the relationship between disposable income and the multiplier?

Answer 18

Any change in one of the factors that impacts on disposable income, will change the multiplier
/If taxes increase the value of the multiplier reduces
/If interest rates increase, savings increase and consumption decreases and the multiplier reduces
/If exchange rates appreciate the level of imports will increase and the multiplier decreases
/If confidence in the economy increases consumption increases and the multiplier increases

Question 19

What is the relationship between the government and the multiplier?

Answer 19

It is extremely useful for the Government to know the value of the multiplier. They can use it to judge the likely economic growth caused by increased spending.