2.4.4: The Multiplier Flashcards
What is the multiplier process?
The idea that a rise in AD due to an increased injection (G, I, X) can lead to a further rise in national income.
How does injections cause higher national incomes?
[->]
Injection -> Economic Growth -> Job Creation -> Increased Spending -> Higher Income.
What is the multiplier ratio?
Final Change in Income / Initial Change in Injection.
What is the effect of the multiplier on the economy?
Quicker growth- any injections lead to a bigger increase in national income.
If the government wants to stimulate the economy…
… they will inject money to people with the highest MPC (those on low incomes).
The overall effect on the economy depends on (two points):
-The change in AD.
-The elasticity on AS.
What is the Marginal Propensity to Consume (MPC) equation?
Change in Consumption / Change in Income.
What is the Marginal Propensity to Save (MPS) equation?
Change in Savings / Change in Income.
What is the Marginal Propensity to Tax (MPT) equation?
Change in Taxation / Change in Income.
What is the Marginal Propensity to Import (MPM) equation?
Change in Imports / Change in Income.
The higher the MPC, the ________ the multiplier size.
Bigger.
The higher the MPS, the ________ the multiplier size.
Smaller.
The higher the MPT, the ________ the multiplier size.
Smaller.
The higher the MPM, the ________ the multiplier size.
Smaller.
What is the multiplier calculation [including MPC]?
1 / 1 - MPC.
