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.
What is the multiplier calculation [including MPW]?
1 / MPW.
What does MPW stand for?
Marginal Propensity to Withdraw.
What does MPW consist of?
MPT + MPS + MPM.
How does the multiplier effect AD shifts (Keynesian)?
The larger the spare capacity, the bigger the output increase.
In an inelastic AS curve, how does the multiplier affect price and output?
Increase in price.
Output stays the same.
In an elastic AS curve, how does the multiplier affect price and output?
Price stays the same.
Increase in output.
