lesson 8- aggregate demand curve and the multiplier effect Flashcards
draw an AD curve
https://images.app.goo.gl/rgtRg6kx5J3muHLD8
what does the AD curve do when aggregate demand increases or decreases?
shifts right (increase)
shifts left (decrease)
what are the factors of aggregate demand, and what impact do they have on the curve?
consumption
investment
government spending
exports - imports
a increase in CIGXM causes the curve to shift right, as AD increases, and vice versa
what is the multiplier effect?
-not formula
investment leads to a bigger/ more proportionate effect on the overall economy
-e.g. £1 invested-> national income increase of more than £1
-introduced by John Keynes
is saving money an injection or a leakage?
-leakage, as money is taken out of the economy
what is the formula for the multiplier effect?
q- what is the multiplier effect on an economy if an investment of £10bn, with a marginal propensity to consume of 0.6
1/(1-MPC)
OR
1/(MPC+MPM+MPS)
q- 1/0.4 x 10
=2.5x10= £25bn
what is:
MPC
MPT
MPM
MPS
marginal propensity to
consume
tax
import
save
why is the multiplier effect on government investment hard to predict?
+ what is the overall prediction?
-hard to measure the exact size
-lag time
it is mainly between 1 and 2
what does the multiplier effect do to the AD curve?
DRAW
further shifts it, creating a third line
https://www.google.com/imgres?q=AD%20curve%20with%20multiplier%20effect&imgurl=https%3A%2F%2Fwww.researchgate.net%2Fprofile%2FMichelle-Esparon%2Fpublication%2F370026230%2Ffigure%2Ffig3%2FAS%3A11431281146362623%401681520005387%2FThe-multiplier-effect_Q320.jpg&imgrefurl=https%3A%2F%2Fwww.researchgate.net%2Ffigure%2FThe-multiplier-effect_fig3_370026230&docid=jWtCJPesg4a6ZM&tbnid=xQ7YQaxf_W5NfM&vet=12ahUKEwicp6W23pKJAxWMaEEAHTIDKYkQM3oECE0QAA..i&w=320&h=320&hcb=2&ved=2ahUKEwicp6W23pKJAxWMaEEAHTIDKYkQM3oECE0QAA
