2.4.4 The Multiplier

Question 1

what is the positive multiplier effect
what is it the ratio of
what determines the size of the multiplier
what consept allows the multiplier to work
what is a negative multiplier effect

Answer 1

-the positive multiplier effect is the idea that an increase in AD because of an increased injection (exports, government spending or investment) can lead to a further increase in national income.

-it is the ratio of the final change in income to the initial change in injection.

-the size of the multiplier depends on how much of n increase in income peole will spend, the MPC. The lower the leakages (savings, imports and taxation) , the higher the MPC, the bigger the multiplier.

-the concept of the circular flow allows it to work, as oneperson’s spending is anoher persons income.

-the negative mulitplier effect occurs when a withdrawal from the economy could lead to an even further fall income, decreasing economic growth and possibly leading to a decline in an economy

Question 2

effects of the multiplier on the economy:
how does the multiplier effect where injections are targeted, apply this to real lfe governments

why might governemnts use the multiplier, what is a drawback of this

overall what will the effect of on the economy depend on

Answer 2

-the multiplier heps growth occur quicker, as a result injections can be targeted at those areas with the biggest MPC, in order to increase the size of the multiplier. for examle, when the government is trying to stimulate the economy, they will give money to those who have the biggest PC: lower incomes.

-governments may use the mulitplier to influence macroeconomic performance, but it is impossible for the government to know the exact effct of their speding as it is difficult to know the size of the multiplier.

-overall the effect on the economy will depend on the change in AD and the elasticity of the AS curve.

Question 3

what is the formula for the Multiplier, how many are there

Answer 3

there are 2 different formulas
- 1/1-MPC
-1/MPW

Question 4

the mulitplier leads to an increase in AD higher than the original increase but for it to have its desired effect, there must be hwat in the economy?

what effect in the economy will the mulitplier have if the AS is perfectly inelastic (like on the classical LRAS or the classical stage of the keynesian LRAS)

(the more elastic the curve, the smaller the effect on the price but the bigger the effect on output)- remember this

-what does the effect of the multiplier depend on

Answer 4

-for the mulitiplier to have its desired effect, there must be sufficient spare capacity in the economy for extra output to be produced.

-if the AS is perfectly inelastic, the mulitiplier will only increase price and not output in the long run, although it will in the short run

-the effect of the multiplier depends on the shape of the AS curve and whether it is in the short run or long run