Economics - Multiplier Effect

Question 1

Marginal Propensity to Consume MPC

Answer 1

the change in consumption divided by change in income

represents the amount of each extra pound that a consumer spends when given an extra pound of income
if the MPC was 0.25 = £0.25
-people who earn less money or live in pooper countries usually have higher MPCs

Question 2

Marginal Propensity to Save MPS

Answer 2

the change in savings divided by change in income

represents the amount of each extra pound that the consumer saves when given an extra pound in income

the portion of extra income that is saved by an individual
savings are a withdrawal and cannot be spent on consumption
Higher MPW, Reduce size of Multiplier

Question 3

Marginal Propensity to Tax MPT

Answer 3

change in tax paid divided by the change in income

represents the amount of each extra pound earned that is spend paying taxes
-also called marginal tax rate

Question 4

Marginal Propensity to Import

MPM

Answer 4

change in imports purchased divided by the change in income

the portion of extra income that is spent by an individual paying for imports from overseas

cannot be spent on consumption

for every extra £1 of income, the MPM is the proportion of that £1 spent on imported goods
Higher MPM increase MPW reduce size of Multiplier

Question 5

Multiplier Effect

Answer 5

an initial change in an injection or leakage that leads to a much greater final change in real national income

AD graph - Price level , Real National Output P1 Y1
SRAS

Question 6

MPC and Multiplier

Answer 6

the higher the MPC the higher the multiplier, more money is passed on at each “stage”

if taxes rise then more money is leaked so the MPC must fall and the multiplier falls

Question 7

Calculating the Multiplier

Answer 7

1/(1-MPC)
e.g. if MPC=0.2
1/(1-0.2)
1/0.8 = 1.25 
INITIAL INJECTION 10BN = 
12.5BN increase in real national income RNI

M=1/MPW

Question 8

when there is an increase in an injection and AD increases what happens for firms etc

Answer 8

• Firms earn more money in profits
• Hire more
• Household income rises
• AD increases and repeat the cycle

Question 9

Marginal Propensity to Withdraw

MPW

Answer 9

MPW= MPS+MPT+MPM

the portion of additional earnings that are taken out of the economy via:

• savings, taxes, imports from abroad withdrawn from the economy
• extra earnings are either spent consuming goods or are withdrawn
• MPC+MPW = 1
• multiplier effect also equals 1/MPW