injections/withdrawels Flashcards
what are the 3 injectons
investment, government expenditure and exports
define injection
boost economic growth. Causes multiplier effect to help increase C
what are the 3 withdrawals
savings, taxation and imports
average propensity to consume formula
consumption / income
average propensity to save formula
savings / income
average propensity to consume + average propensity to save =
1
define margin
anything extra
what is marginal propensity to consume
measures how much consumption will change following a change in income
marginal propensity to consume formula
change in consumption / change in income
marginal propensity to save formula
change in savings / change in income
marginal propensity to consume + marginal propensity to save =
1
marginal propensity to import formula
change in import / change in income
marginal propensity to withdraw formula
marginal propensity to save + marginal propensity to tax + marginal propensity to import
marginal propensity to consume + marginal propensity to withdraw =
1
factors affecting marginal propensity to consume
income levels (low income high MPC), interest rates (high IR encourages saving), consumer confidence (high confidence encourages spending)
what is the multiplier effect
when an injection into the economy leads to a bigger final increase in GDP
Multiplier formula
1/1-MPC or 1/MPW
what determines the size of the multiplier
% of extra income spent
marginal propensity to consume + marginal propensity to withdraw =
1
what gives a high multiplier
high MPC / low MPW
What does a high multiplier do
makes things like government intervention more likely to succeed
Define accelerator
An increase in national income results in a proportionally larger rise in investment
Describe the accelerator effect
Demand for capital goods is driven by the demand for products that the firm is supplying in the market . A given change in demand for consumer goods will cause a greater percentage change in demand for capital goods. Therefore an increase in economic growth will have a corresponding larger increase in the level of investment.
How does an injection effect the multiplier
Helps increase C, this is accelerated by an increase in I, if national income increases so will I increasing GDP.
what is induced investment?
investment as a function of output
what is autonomous investment?
investment increases/decreases independently of economic output
why might the accelerator effect not work?
- Firms may not believe the increase in C will last (confidence does not improve).
- Firms may not need to invest due to them having large amounts of spare capacity (e.g. during a recession).
- Firms may be encouraged to invest even if real GDP is falling (e.g. new technological advancements).
What is the principle of the accelerator effect
a given change in demand for consumer goods will cause a greater percentage change in demand for capital goods
