2.4.4: The Multiplier Flashcards
1
Q
What is the multiplier?
A
- 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
2
Q
What is the formula of the multiplier?
A
- 1/ 1-MPC
3
Q
What is the Marginal Propensity to Consume (MPC)?
A
- refers to the proportion of extra income is spent
4
Q
What is the formula for MPC?
A
- Increase in Consumption/ Increase in Income
5
Q
What idea is the multiplier process based on?
A
- On the idea that one individual’s spending is another individual’s income
6
Q
What is the negative multiplier effect?
A
- When injections into the economy are reduced/ when there are more withdrawals from the economy
7
Q
What is the marginal propensity to save?
A
- the proportion of extra income that is saved
8
Q
What is the formula for MPS?
A
- Change in Savings/ Change in Income
9
Q
What is the marginal propensity to tax?
A
- refers to the proportion of extra income that is paid in tax
10
Q
What is the formula for MPT?
A
- Change in tax/ Change in Income
11
Q
What is the marginal propensity to import?
A
- refers to the proportion of additional income that is spent on imports
12
Q
What is the formula of MPM?
A
Change in Imports/ Change in Income
13
Q
What is the formula of the multiplier in regards to withdrawals?
A
- 1/ MPW
14
Q
What is the marginal propensity to withdraw?
A
- The extra income withdrawn from the circular flow of income
15
Q
How can MPW be calculated?
A
- MPS + MPT + MPM
16
Q
How do withdrawals affect the multiplier?
A
- The greater the withdrawals, the smaller value of the multiplier (and vice versa)
17
Q
How does MPC affect the multiplier?
A
- The greater MPC, the greater the value of the multiplier ( and vice versa)
18
Q
How do taxes affect the multiplier?
A
- If taxes increase, the value of the multiplier reduces
