2.4.4 multiplier effect

Question 1

what is the multiplier effect?

Answer 1

its where an initial change in spending from consumers, government and businesses leads to a larger more widespread final impact on an economy’s total output or income.

Question 2

what is the multiplier ratio?

Answer 2

the ratio quantifies the total change in national income resulting from an initial change in spending.

Question 3

explain the multiplier process when an investment is made to build a factory?

Answer 3

think of builders output capital spending from salaries etc

Question 4

what is a positive multiplier effect?

Answer 4

when an initial increase in injection or decrease in leakages leads to greater final increase in real GDP

Question 5

what is a negative multiplier effect?

honda plant closes in uk 3500 jobs lost

Answer 5

when an initial decrease in an injection or an increase in leakages leads to greater final decrease in real GDP

Question 6

what is multiplier?

Answer 6

the change in GDP/ Initial injection

Question 7

how to calculate the marginal rate of leakage and the multiplier value.

Answer 7

1/sum of mps + mpt + mpm

Question 8

what is the multipier formula when its simple without gov

so no taxes

Answer 8

1 / MPS

Question 9

how does the multiplier effect arise?

eg uk gov wants new gigafactories

Answer 9

It arises because one agent’s spending is another agent’s income.

When a spending project creates new jobs, it injects extra income and demand into the country’s circular flow of income.

Question 10

what is a multiplier equation with MPC?

Answer 10

1 / 1- MPC

Question 11

what is the multiplier formula extend when gov spending in there?

Answer 11

1 / mps + mpm + mpt

Question 12

what are MPS MPT AND MPM?

Answer 12

MPS is the fraction of additional income that is saved

MPT is the fraction on additional income that is paid in taxes

MPM is the fraction of additional income spent on imports

Question 13

what factors affect multiplier value?

Answer 13

MPC is high because it leads to a larger multiplier effect. A greater proportion of any increase in income is spent, which leads to multiple rounds of increased spending and output.

MPW is low import, taxes low

Degree of spare capacity: there must be sufficient spare capacity in an economy for extra output to be produced to get the effects of multiplier

fiscal policy if expansionary greater multiplier effect

Question 14

what happens if AS is highly elastic?

what happens if AS is inelastic?

Answer 14

the multiplier effect will be high

the multiplier effect will be low