Chapter 13.4

Question 1

The Importance of the Multiplier

What is the Keynesian Multiplier?

Answer 1

The change in real GDP divided by the initial change in expenditure

Question 2

The Importance of the Multiplier

What is the rule of the multiplier?

Answer 2

It should be greater than 1 so the change in GDP is greater than the initial change in expenditure.

Question 3

Understanding the Multiplier in Terms of Leakages and injections

Why does a change in expenditure produce a larger change in total AD and real GDP?

Answer 3

The initial change in expenditure produces a chain reaction of further expenditures with the effect of increasing AD and real GDP to have a greater value than the initial expenditure

Question 4

Understanding the Multiplier in Terms of Leakages and injections

What is the marginal propensity to consume (MPC)?

Answer 4

The fraction of additional income that households spend on consumption of domestically produced goods and services

Question 5

Understanding the Multiplier in Terms of Leakages and injections

What is the marginal propensity to save?

Answer 5

Fraction of additional income saved

Question 6

Understanding the Multiplier in Terms of Leakages and injections

What is the marginal propensity to tax?

Answer 6

Fraction of additional income taxed

Question 7

Understanding the Multiplier in Terms of Leakages and injections

What is the marginal propensity to import?

Answer 7

Fraction of additional income spent on imported goods and services

Question 8

Understanding the Multiplier in Terms of Leakages and injections

What is the relation between the marginal propensities?

Answer 8

MPC+MPS+MPT+MPM=1

Question 9

Understanding the Multiplier in Terms of Leakages and injections

How can the multiplier be written in terms of marginal propensities?

Answer 9

Multiplies=1/(1-MPC) or 1/(MPS+MPT+MPM)

Question 10

Understanding the Multiplier in Terms of Leakages and injections

What is the relationship between the value of the MPC and the multiplier?

Answer 10

The larger the MPC, the greater the multiplier

Question 11

Understanding the Multiplier in Terms of Leakages and injections

What is the relationship between the amount of leakages and the value of the multiplier?

Answer 11

The smaller the leakages, the greater the multiplier

Question 12

How the Multiplier Relates to AD

What is autonomous spending?

Answer 12

Spending that has not been caused by a change in income

Question 13

How the Multiplier Relates to AD

What is induced spending?

Answer 13

Spending caused by changes in income

Question 14

How the Multiplier Relates to AD

What is the effect of the multiplier on AD based on?

Answer 14

The sum of autonomous and induced spending

Question 15

How the Multiplier Relates to AD

How is the multiplier effect initiated?

Answer 15

By autonomous spending

Question 16

The Effect of the Multiplier in Relation to the Price Level

What is the condition for the multiplier to have the greatest possible effect on real GDP?

Answer 16

Price level is constant

Question 17

The Effect of the Multiplier in Relation to the Price Level

What happens to the multiplier when the price level begins to increase?

Answer 17

The increasing price level absorbs entire multiplier effect leading it to be 0

Question 18

The Effect of the Multiplier in Relation to the Price Level

On what thinking is the multiplier based on?

Answer 18

Keynesian thinking

Question 19

The Effect of the Multiplier in Relation to the Price Level

What does the multiplier allow the economy to do when in a recessionary gap?

Answer 19

Unemployed resources and spare capacity allow AD to increase without putting upward pressure on price level. Any autonomous increase in spending leads to a substantially larger increase in real GDP