3.4 Government Spending Flashcards
What is the positive multiplier effect?
The positive multiplier effect occurs when an initial increase in an injection (or a decrease in a leakage) leads to a greater final increase in real GDP.
What is the negative multiplier effect?
The negative multiplier effect occurs when an initial decrease in an injection (or an increase in a leakage) leads to a greater final decrease in real GDP.
What is the multiplier effect process?
The multiplier effect process is the extra demand and factor incomes created when an initial change in one of the components of aggregate demand (AD) leads to a multiplied final change in the equilibrium level of GDP. The process comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending, which leads to a bigger final effect on the level of national output and employment.
What is the marginal propensity to consume (MPC)?
The marginal propensity to consume (MPC) is the change in consumption following a change in income. It is calculated as the change in total consumption divided by the change in gross income.
What is the marginal propensity to save (MPS)?
The marginal propensity to save (MPS) is the change in savings following a change in income. It is calculated as the change in total savings divided by the change in gross income.
What is the multiplier effect?
The multiplier effect is the multiplied final change in the equilibrium level of GDP that results from a change in one of the components of aggregate demand (AD). It comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending, which leads to a bigger final effect on the level of national output and employment.
How is the multiplier calculated?
The multiplier is calculated as 1 divided by the sum of the propensity to save, tax, and import.
What is an example of the multiplier effect?
An example of the multiplier effect is a government project to inject £200 million in a project to build thousands of new affordable houses. The final increase in measured GDP is likely to be more than £200 million because the extra demand stimulates further rounds of spending.
What is the marginal rate of leakage and the multiplier value?
The marginal rate of leakage is the rate at which money leaks out of the circular flow of income and spending via savings, imports, and taxation. The multiplier value is the magnitude by which a change in aggregate demand is multiplied. The multiplier value is inversely related to the sum of the marginal rate of leakage, and is calculated as 1 divided by the sum of the marginal propensity to save, tax, and import.
What is the simple multiplier calculation?
The simple multiplier calculation assumes no tax or imports, with only savings as the leakage from the circular flow of income and spending. The multiplier coefficient is calculated as 1 divided by 1 minus the marginal propensity to consume (MPC).
What is the more complex multiplier calculation?
The more complex multiplier calculation takes into account three leakages (savings, imports, and taxation) and is calculated as 1 divided by the sum of the marginal propensity to save (MPS), marginal rate of taxation (MRT), and marginal propensity to import (MPM).
What is government spending?
Government spending is the expenditure by the public sector on goods and services such as education, health and defence.
What is the distinction between the 3 types of government expenditure (G, I, and AME)?
G refers to resource departmental expenditure limits, which includes expenses such as salaries for public sector employees. I refers to capital departmental expenditure limits, which includes expenses for investments such as new infrastructure. AME refers to annually managed expenditure, which includes transfer payments like jobseeker’s allowance.
Give an example of an area of spending classed as G
NHS salaries
Give an example of an area of spending classed as I
New motorway bridge
