AD and the level of economic activity Flashcards

1
Q

Multiplier effect

A

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

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2
Q

Multiplier ratio

A

Total change in real GDP = injection X multiplier

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3
Q

The multiplier is larger when…

A

Withdrawals from the circular flow are smaller

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4
Q

Formula for multiplier

A

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

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5
Q

Factors affecting the value of the multiplier effect

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