LS7 - The Multiplier Flashcards

1
Q

The Multiplier Effect

A

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

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2
Q

Marginal Propensity to Save

A

MPS - proportion of any extra income that is saved
MPS = change in savings ÷ change in income
MPC + MPS = 1

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3
Q

Marginal Propensity to Consume

A

MPC - proportion of extra income that is spent
MPC = change in consumption ÷ change in income
MPC + MPS = 1

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4
Q

Marginal Propensity to Tax and Import

A

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

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5
Q

Marginal Propensity to Withdraw

A

MPW = MPS + MPM + MPT
Multiplier = 1 ÷ MPW

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