2.4.4 - The Multiplier

Question 1

What Is The Multiplier?
(4 Points)

Answer 1

~ Process by which any changes in the components of AD, will lead to an even greater change in national output.

~ Any increase in spending (Initial injection) -> will create income for someone else -> facilitate spending for them -> this process continues.

~ In the ratio of final change in income to initial change in injection.

~ Means that growth can occur quicker.

Question 2

What Are All The Marginal Propensities?
(5 Points)

Answer 2

~ MPC -> Proportion of additional income that is spent.

~ MPS -> Proportion of additional income that is saved.

~ MPT -> Proportion of additional income that is paid in tax.

~ MPM -> Proportion of additional income that is spent on imports.

~ MPW (MPS + MPT + MPM) -> Proportion of additional income that is being withdrawn from the economy.

Question 3

How Can We Measure The Size Of The Multiplier?

Answer 3

Multiplier = 1 / 1 - MPC x Initial Injection or = 1 / MPW.

Question 4

What Determines The Size Of The Multiplier?
(3 Points)

Answer 4

~ Bigger the value of the multiplier the more the final change in real GDP.

~ The size of the MPC (Injection) or withdrawal.

~ The MPC is determined by MPS, MPT and MPM.

Question 5

What Is The Accelerator?

Answer 5

Changes in investment can be directly linked to changes in the rate of GDP growth.