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Economics - February-April > 4) The Size Of The Multiplier - MMT > Flashcards

4) The Size Of The Multiplier - MMT Flashcards

1
Q

Why are economists and governments keen to identify the size of the multiplier effect?

A

Enables them to make better projections into the future, better policy decisions today

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2
Q

How is the multiplier calculated?

A

1/ 1- MPC or 1/MPW

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3
Q

What does MPC stand for?

A

M - Marginal
P - Propensity
to
C - Consume

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4
Q

What does Propensity mean?

A

Another word for likelihood or tendency
Propensity to consume: what is the likelihood of us consuming our income?

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5
Q

What does the Average Propensity to consume show?

A

Shows the % of income that consumers tend to spend

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6
Q

APC, APS, APT, APM

A
  • Average Propensity to Consume
  • Average Propensity to Save
  • Average Propensity to Tax
  • Average Propensity to Import
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7
Q

What is the formula for APC?

A

C/Y

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8
Q

What is the formula for APS?

A

S/Y

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9
Q

What is the formula for APT?

A

T/Y

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10
Q

What is the formula for APM?

A

M/Y

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11
Q

What does the Average Propensity to Save show?

A

Shows the % of income we save

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12
Q

What does the Average Propensity to Tax show?

A

Shows % of incomes paid in taxation

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13
Q

What does the Average Propensity to Import show?

A

Shows % of incomes spent on Imports

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14
Q

What is the APC in the UK?

A

In the UK on average, consumers spend around 65% of their income, so APC = 0.65

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15
Q

What is the APS in the UK?

A

We assume in the UK this is 5%, so APS = 0.05

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16
Q

What is the APT in the UK?

A

Assumed 20% = APT = 0.2

17
Q

What is the APM in the UK?

A

Assumed 10% so APM = 0.1

18
Q

All household income is either…

A

Consumed, saved, taxed or imported… APC+APS+APT+APM = 1

19
Q

Do economists like using averages?

A

On the whole economists are not too focused on averages (they’re for accountants), economists are fascinated by what happens at the margin, ie marginal figures, this shows the outcome of any change - eg if your income increase by £1, how much will you consume? Save? Pay in Tax? Import?

20
Q

How is Marginal Propensity to Consume calculated?

A

Change in C/ Change in Y

21
Q

How is Marginal Propensity to Save calculated?

A

Change in S/ Change in Y

22
Q

How is Marginal Propensity to Tax calculated?

A

Change in T/ Change in Y

23
Q

How is Marginal Propensity to Import calculated?

A

Change in M/ Change in Y

24
Q

Households only have 4 options with there change in income…

A

Consume, save, pay more tax or import, therefore MPC+ MPS+MPT+MPM = 1, however…

25
Q

Why is C different to S, T and M?

A

Because C increases RGDP whilst leakages reduce it, so we can now slightly separate the 4 household choices, we refer S, T and M as withdrawals as money is being withdrawn from the circular flow of income

26
Q

What are combined to make withdrawals?

A

MPS+MPT+MPM are combined to measure total withdrawals - MPW- the Marginal Propensity to Withdraw

27
Q

MPC+ MPW =

A

1

28
Q

1- MPC =

A

MPW

29
Q

The higher the leakages, the… is MPC…

A

Lower… the lower the Multiplier effect

30
Q

1/ (1 - MPC) =

A

1/ MPW as MPC+MPW = 1

31
Q

The multiplier effect means that AD…

A

Keeps shifting to the right

32
Q

How do you calculate the final change in output?

A

Multiply the multiplier and initial value that was injected

33
Q

The bigger the MPC, the… the multiplier
The smaller the MPC, the… the multiplier

A

Bigger, smaller

34
Q

The accelerator is linked to changes in the…

A

Rate of GDP growth, if the rate of GDP slows or becomes negative firms will stop investing reducing AD

35
Q

What do the multiplier and accelerator explain?

A

They explain the shape of the business cycle

36
Q

The accelerator facilitates…

A

Even quicker decreases in the rate of GDP growth

Economics - February-April (19 decks)

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