2.4.4 - The multiplier Flashcards
What jobs would be created if HS2 were to be built?
- Architectual jobs
- Builder
- People to transport goods
- Ticket people
- Cleaners
- Train drivers
- Sales manager
- Maintenance people
What is the link between aggregate demand the activity in the economy?
The higher the level of aggregate demand in an economy, the higher the level of economic activity.
A large part of government economic policy is designed to stimulate the various components of aggregate demand
Any increase in C + I + G + (X - M), will shift the aggregate demand curve to the right, and consequently will increase the level of real national output
An increase in any of the components of aggregate demand will lead to a rise in the circular flow of income.
What is the definition of aggregate demand?
The total demand for all goods and services in an economy at any given price level over a period of time.
What’s the formula for aggregate demand?
C + I + G + (X - M)
Which parts of aggregate demand are injections?
Investments, government spending and exports.
What parts of aggregate demand are withdrawals?
Imports
What does MPC stand for?
Marginal propensity to consume.
What is MPC
The proportion in any change in income that is spent rather than saved.
If income increases by £100 and the MPC is 0.7 then £70 of the increase in income will be spent on consumption.
What does MPW stand for?
Marginal propensity to withdraw
What is the multiplier formula ?
K = 1 / MPW
What’s the other formula for calculating the multiplier?
K = 1 / 1 - MPC
What is the multilplier effect?
This is when an initial injection occurs into the economy, or circular flow of income, causes a larger final increase in the level of real national income/output.
Why is the multiplier so significant for shifts in AD?
By targeting those individuals with a high MPC the government can increase AD dramatically. This implies that, in times of low demand, focus should be on
increasing the income of those with a high MPC.
What is MPS?
This is the marginal propensity to save.
If interest rates are high, then consumption may not rise significantly as additional income may be saved rather than spent.
What is MPT?
This is marginal propensity to tax.
Taxes are a withdrawal from the circular flow, if tax rates are high then consumers will be deterred from spending or simply have less disposable income with which to consume goods and services.
What is MPM?
This is marginal propensity to import.
In the UK, we have a high propensity to consume imports. If we receive increases in disposable income, but this is spent on imported goods, then this would count as a withdrawal or leakage from the circular flow of income and national income would not rise as much as anticipated.
What is the multiplier determined by?
It’s determined by the size of the leakages from the economy – MPS, MPT and MPM.
Name 2 things that have an effect on the economy and explain
- If there is very little spare capacity in the economy, then any increase in aggregate demand may not be able to be met by firms
- Unemployment
- Economic growth
- Inflation
- Exchange rates
- The size of the multiplier is almost impossible to measure as it takes into account numerous factors
- It is likely that those on low incomes will have a higher MPC so AD will shift further to the right if government prioritise these
What graph can be used to show the effects of the economy on the multiplier?
LRAS curve
Draw a LRAS curve
- Y axis labelled as “Price Level”
- X axis labelled as “Real National Output”
- LRAS Curve
- AD Line
- “P” on the Y axis to show current price
- “FE” at the point where LRAS stops curving and goes into a straight line
- “Y” or “Y1” labelled on the X axis to show a new equilibrium
