Accelerator/Multiplier effect Flashcards
1
Q
What is the accelerator effect?
A
Occurs when an increase in national income leads to a proportionally larger rise in investment
2
Q
What is the multiplier effect?
A
An increase in final income resulting from any new injection of spending
3
Q
What factors affect the multiplier effect?
A
MPC- marginal propensity to consume -MPS- marginal propensity to save -Spending on imports -Taxation If 3 factors above are high it decreases the MPC and therefore the multiplier effect
4
Q
What is the formula for the multiplier effect?
A
1
——– = A
1-MPC
A x injection
5
Q
Draw a graph showing the multiplier effect
A
Notes
6
Q
What is the household savings ratio?
A
The % of disposable income that is saved
7
Q
How does a fall in GDP effect the savings ratio and what happens to AD?
A
Fall in GDP = increase in savings ratio, more people saving reduces AD
