4) The Size Of The Multiplier - MMT Flashcards
Why are economists and governments keen to identify the size of the multiplier effect?
Enables them to make better projections into the future, better policy decisions today
How is the multiplier calculated?
1/ 1- MPC or 1/MPW
What does MPC stand for?
M - Marginal
P - Propensity
to
C - Consume
What does Propensity mean?
Another word for likelihood or tendency
Propensity to consume: what is the likelihood of us consuming our income?
What does the Average Propensity to consume show?
Shows the % of income that consumers tend to spend
APC, APS, APT, APM
- Average Propensity to Consume
- Average Propensity to Save
- Average Propensity to Tax
- Average Propensity to Import
What is the formula for APC?
C/Y
What is the formula for APS?
S/Y
What is the formula for APT?
T/Y
What is the formula for APM?
M/Y
What does the Average Propensity to Save show?
Shows the % of income we save
What does the Average Propensity to Tax show?
Shows % of incomes paid in taxation
What does the Average Propensity to Import show?
Shows % of incomes spent on Imports
What is the APC in the UK?
In the UK on average, consumers spend around 65% of their income, so APC = 0.65
What is the APS in the UK?
We assume in the UK this is 5%, so APS = 0.05
What is the APT in the UK?
Assumed 20% = APT = 0.2
What is the APM in the UK?
Assumed 10% so APM = 0.1
All household income is either…
Consumed, saved, taxed or imported… APC+APS+APT+APM = 1
Do economists like using averages?
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?
How is Marginal Propensity to Consume calculated?
Change in C/ Change in Y
How is Marginal Propensity to Save calculated?
Change in S/ Change in Y
How is Marginal Propensity to Tax calculated?
Change in T/ Change in Y
How is Marginal Propensity to Import calculated?
Change in M/ Change in Y
Households only have 4 options with there change in income…
Consume, save, pay more tax or import, therefore MPC+ MPS+MPT+MPM = 1, however…
Why is C different to S, T and M?
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it, so we can now slightly separate the 4 household choices, we refer S, T and M as withdrawals as money is being withdrawn from the circular flow of income
What are combined to make withdrawals?
MPS+MPT+MPM are combined to measure total withdrawals - MPW- the Marginal Propensity to Withdraw
MPC+ MPW =
1
1- MPC =
MPW
The higher the leakages, the… is MPC…
Lower… the lower the Multiplier effect
1/ (1 - MPC) =
1/ MPW as MPC+MPW = 1
The multiplier effect means that AD…
Keeps shifting to the right
How do you calculate the final change in output?
Multiply the multiplier and initial value that was injected
The bigger the MPC, the… the multiplier
The smaller the MPC, the… the multiplier
Bigger, smaller
The accelerator is linked to changes in the…
Rate of GDP growth, if the rate of GDP slows or becomes negative firms will stop investing reducing AD
What do the multiplier and accelerator explain?
They explain the shape of the business cycle
The accelerator facilitates…
Even quicker decreases in the rate of GDP growth
