2.4.4- The Multiplier Flashcards
What is the multiplier ratio?
The ratio of the rise in national income to the initial rise in AD
What is the multiplier effect?
When an initial change in spending leads to a larger and more widespread final impact on an economy’s total output or income
How does the multiplier effect work?
When an individual increases its spending, the recipients of that spending then have more income, which they spend on goods and services, which creates additional demand, which prompts firms to increase production and hire new workers
What is a negative multiplier effect?
An initial decrease in an injection leads to a greater final decrease in the level of real gdp
How does the multiplier affect growth?
Growth can happen quicker
How can injections be targeted by the government due to the multiplier effect?
At those with the highest MPC
Why does the multiplier effect have a time lag?
Not everyone will spend the money straight away
How does the marginal propensity to consume affect the size of the multiplier?
The higher the MPC, the bigger the size of the multiplier
How could the gov influence the MPC?
Changing the rate of direct tax
How does the marginal propensity to save affect the size of the multiplier?
If consumers save more, the size of the multiplier will be small
How does the marginal propensity to tax affect the size of the multiplier?
The higher the rate of tax, the less disposable income, so the smaller the size of the multiplier
How does the marginal propensity to import affect the size of the multiplier?
If consumers import more, income is withdrawn from the circular flow, which reduces the size of the multiplier
What is the multiplier formula for a closed economy?
1/( 1- MPC)
What is the multiplier formula for an open economy?
1/(MPS+MPM+MPT)
What is needed in the economy for the multiplier to have the desired effect?
Sufficient spare capacity in the economy
