Chapter 21 Flashcards
What is the multiplier
The multiplier effect occurs when there is an initial injection into the circular flow causes a bigger final increase in real national incomes
In order to calculate the multiplier we need to consider
The average propensity to consume as a ratio to consumer income, marginal propensity to consume and marginal propensity to save
What is propensity?
A ‘propensity’ to do something is a tendency. In the present context, economic agents are said to have a propensity (tendency) to use any additional (marginal) income in a number of ways - to consume, to save, to spend on imports, to tax, and so on.
What is the average propensity to consume
the proportion of income that households devote to consumer expenditure
What is the marginal propensity to consume (mpc)
the proportion of additional income devoted to consumer expenditure
What is the marginal propensity to save (mps)
the proportion of additional income that is saved by households
What is the marginal propensity to import (mpm)
the proportion of additional income that is spent on the import of goods and services
What is the marginal propensity to tax (mpt)
the proportion of additional income that is taxed
What is the marginal propensity to withdraw (mpw)
the proportion of additional income that is withdrawn from the circular flow - the sum of the marginal propensity to save, import and tax
What is the marginal propensity to withdraw (mpw)
the proportion of additional income that is withdrawn from the circular flow - the sum of the marginal propensity to save, import and tax
What is the formula for marginal propensity to withdraw
mpw = mps + mpm + mpt
What is the formula for marginal propensity to consume
mpc = 1 - mpw
What is the accelerator
a theory by which the level of investment depends upon the change in real output
What is the output gap
The difference between the actual level of real GDP and the full employment level. When the output gap is positive, the economy is above full employment. When the output gap is negative, GDP is below full employment
What are the causes of a positive output gap
An increase in aggregate demand, increase in government expenditure or export demand. (in the short run). They use the factors of production more intensively. Though is unsustainable in the long run. As prices begin to rise and firms face higher input costs. This means in the long term this has no effect on GDP but prices will rise.
What are the causes of a negative output gap
Negative external shock to aggregate demand: global slowdown - leads to a fall in exports, or government cuts back on expenditure. Aggregate demand falls. The consequences of this can be temporary or permanent. Or whether the economy faces a neoclassical or Keynesian aggregate supply curve.
What formula do you use to calculate the multiplier
mpw
Why does the mutiplier effect arise
An agents spending is another agents income, this creates extra income and injections into the circular flow
output gap on a neoclassical model
The market forces in the economy are expected to return the economy too full employment
What is the formula for Marginal propensity to consume
Change in consumption/ changing in income (this is repeated for others)
