Lesson 22 - The Multiplier Flashcards
How does the multiplier work?
Change to component of AD leads to multiplied final change in eq. level GDP
Altering 1 value in circ. flow changes subsequent factors
How does a leakage from the circular flow influence the multiplier?
Leakages reduce the multiplier
Negative correlation
How does the multiplier relate to spending?
Increased priv/govt spending results in larger increase to GDP
Why does spending induce a large multiplier?
Multiplier results in extra income
Allows for further increases in spending (Income + Tax)
Process repeats
Why does the Multiplier Effect take place?
Injections of demand for new G+S stimulate spending
‘One person’s spending is another person’s income’
Impact on national output + employment is ‘multiplied’
When does a positive multiplier occur?
Initial increase in injection / Decrease in leakage results in greater final increase in real GDP
When does a negative multiplier occur?
Initial increase in leakage / Decrease in injection results in greater final decrease in real GDP
What is the multiplier formula?
k = 1/Marginal propensity to leak
Simple: 1/MPS
Complex: 1/MPS+MPT+MPM
What is MPC?
Marginal propensity to consume
Proportion of extra income spent
What is MPS?
Marginal propensity to save
Proportion of extra income saved
What is MPM?
Marginal propensity to import
Proportion of extra income spent on imports
What is MPT?
Marginal propensity to tax
Extra tax paid on additional income
When does a high multiplier occur?
High spare capacity
MPT + MPS low
MPC high
When does a low multiplier occur?
Close to full capacity
High propensity to import G+S - Demand leaks from CF
High inflation causes high IR - Dampens other AD comps.
What is the Accelerator Effect?
Surge in capital spending when an economy is growing strongly
