2.4.4: The Multiplier Flashcards
What is the multiplier?
- refers to how an initial increase in AD leads to an even bigger increase in national income
- (or) The multiplier ratio is the ratio of change in real income to the injection that created the change
What is the formula of the multiplier?
- 1/ 1-MPC
What is the Marginal Propensity to Consume (MPC)?
- refers to the proportion of extra income is spent
What is the formula for MPC?
- Increase in Consumption/ Increase in Income
What idea is the multiplier process based on?
- On the idea that one individual’s spending is another individual’s income
What is the negative multiplier effect?
- When injections into the economy are reduced/ when there are more withdrawals from the economy
What is the marginal propensity to save?
- the proportion of extra income that is saved
What is the formula for MPS?
- Change in Savings/ Change in Income
What is the marginal propensity to tax?
- refers to the proportion of extra income that is paid in tax
What is the formula for MPT?
- Change in tax/ Change in Income
What is the marginal propensity to import?
- refers to the proportion of additional income that is spent on imports
What is the formula of MPM?
Change in Imports/ Change in Income
What is the formula of the multiplier in regards to withdrawals?
- 1/ MPW
What is the marginal propensity to withdraw?
- The extra income withdrawn from the circular flow of income
How can MPW be calculated?
- MPS + MPT + MPM
How do withdrawals affect the multiplier?
- The greater the withdrawals, the smaller value of the multiplier (and vice versa)
How does MPC affect the multiplier?
- The greater MPC, the greater the value of the multiplier ( and vice versa)
How do taxes affect the multiplier?
- If taxes increase, the value of the multiplier reduces