2.4.4 The Multiplier Flashcards
Define the multiplier?
When a initial injection in the circular flow causes a larger effect on national income equilibrium. (Initial change in AD).
What is the multiplier ratio?
Final rise/ initial (injection)
This calculates the value of the multiplier.
How can you also calculate the value of the multiplier?
1/ 1-MPC OR 1/MPW
The higher the what the higher the multiplier?
MPC (not withdraw).
How does AD link to the multiplier?
As the multiplier is on AD components ( investment, gov spending and exports).
What is the negative multiplier effect?
Initial withdrawal or leakage causes a bigger fall in circular flow/ real GDP.
How is the multiplier significant for AD shifts?
- leads to higher increase than original.
What is needed in order for multiplier to have an effect that is not inflation?
Spare capacity.
How does elasticity link to the multiplier effect?
Inelastic (vertical) multiplier only causes inflation.
Elastic (horizontal) the multiplier increases Output.
How can the multiplier effect the economy?
- helps growth rate increase faster.
- should target people with largest MPCS (low income).
What is difficult about the multiplier?
- tricky to calculate.
- time lags.
What is the multiplier process?
As one persons spending is another’s income therfore new jobs/income from injections results in extra injections of income and demand into the circular flow.
What is the accelerator effect?
When an increase in national income results in proportionately larger rise in Capitol investment.
As if firms expect high demand will sustain they may increase their supply capacity.
What is the marginal propensity to consume? How does it effect the multiplier? What is it good for?
Proportion of extra income that is spent in the economy.
Larger means bigger multiplier effect as it will effect the size of the initial injection.
Evaluating eg. Overall effect of gov spending depends on MPC as if its low then so will the multiplier resulting in small increase of real GDP.
