AD and the level of economic activity

Question 1

Multiplier effect

Answer 1

A change in one of the components of AD can lead to a multiplied final change in the equilibrium level of GDP

Question 2

Multiplier ratio

Answer 2

Total change in real GDP = injection X multiplier

Question 3

The multiplier is larger when…

Answer 3

Withdrawals from the circular flow are smaller

Question 4

Formula for multiplier

Answer 4

Multiplier= 1/[1- marginal propensity to consume]
i.e 1/MPW

Question 5

Factors affecting the value of the multiplier effect

Answer 5

• MPC
• spare capacity
• size of the initial change
• the nature of products