LS7 - The Multiplier Flashcards
The Multiplier Effect
Injections into the circular flow of income lead to even larger increases in the national income of an economy
Final change in real GDP ÷ Initial change in AD
Marginal Propensity to Save
MPS - proportion of any extra income that is saved
MPS = change in savings ÷ change in income
MPC + MPS = 1
Marginal Propensity to Consume
MPC - proportion of extra income that is spent
MPC = change in consumption ÷ change in income
MPC + MPS = 1
Marginal Propensity to Tax and Import
MPT - proportion of extra income that is paid as taxes = change in taxation ÷ change in income
MPM - proportion of extra income that is spent on imports = change in spending on imports ÷ change in income
Marginal Propensity to Withdraw
MPW = MPS + MPM + MPT
Multiplier = 1 ÷ MPW