2.4.4 - multiplier effect Flashcards
What is the multiplier effect?
The multiplier effect is an initial change in an injection or leakage into the circular flow of income that can have a greater final impact on equilibrium national income.
How is the multiplier effect defined?
It is defined as the final change in equilibrium national output resulting from an initial change in aggregate demand.
What is the ratio used in the multiplier effect?
It is the ratio of the final change in income to the initial change in injection.
What is the marginal propensity to consume (MPC)?
The marginal propensity to consume is the measure of the proportion of an increase in income that a person or household is likely to spend on consumption (goods and services) rather than save: MPC = ∆C/∆INC.
What is the marginal propensity to save (MPS)?
The marginal propensity to save is the measure of the proportion of an increase in income that a person or household is likely to save.
What is the marginal propensity to tax (MPT)?
The marginal propensity to tax is the measure of the proportion of an increase in income that is spent on taxation by households or people.
What is the marginal propensity to import (MPM)?
The marginal propensity to import is the measure of the proportion of an increase in income that is spent on imports by households or people.
What is the marginal propensity to withdraw (MPW)?
The marginal propensity to withdraw is the increase in leakages following an increase in income: MPW = MPS + MPT + MPM; MPW = 1 - MPC.
Why does the multiplier work in circular flow?
The multiplier works due to the concept of circular flow as the injection goes around the process multiple times.
What happens when an individual increases spending?
When an individual increases its spending, the recipients of that spending will have more income, which is then spent on goods and services.
What does additional demand for goods and services create?
Additional demand prompts businesses to increase production, hire more workers, and results in higher factor incomes.
What is the positive multiplier effect?
The positive multiplier effect occurs when there is an initial increase in an injection or a decrease in leakage, leading to a greater final increase in the level of real GDP.
What is the negative multiplier effect?
The negative multiplier effect occurs when there is an initial decrease in an injection or an increase in leakage, leading to a greater final decrease in the level of real GDP.
What is the formula for the multiplier in a closed economy with no government?
Multiplier = 1/MPS or 1/(1-MPC) as MPC + MPS = 1.
What is the formula for the multiplier in an open economy with GOV?
Multiplier = Change in real GDP/Initial change in spending or Multiplier = 1/MPW; 1/(1-MPC).
