Macro 13 - Multiplier

Question 1

Define the multiplier effect

Answer 1

Gains in AD and output are greater than the spending that caused it

Question 2

Define the negative multiplier effect

Answer 2

Fall in AD and output is greater than the fall in spending that caused it

Question 3

Explain the multiplier

Answer 3

Injections of new demand for goods into the circular flow of income with stimulate further rounds of spending. This has a bigger final impact on output and employment

Question 4

What factors affect the multiplier?

Answer 4

The marginal propensity to withdraw (MPW)

Question 5

What is the MPW - Marginal propensity to withdraw?

Answer 5

Proportion of the change of income that leaves the circular flow of income

In the form of:
Savings, tax and imports

Question 6

What is the formula for the MPW?

Answer 6

MPS + MPT + MPM

Question 7

When does the multiplier have a big impact on the economy?

Answer 7

When the marginal propensity to withdraw is low.

Question 8

What is the formulas for the multiplier?

Answer 8

1/1-MPC and 1/MPW

Question 9

If the MPC is 0.8 then what is the multiplier?

Answer 9

5

(if there is an injection of 50 mil, this would generate a revenue of 50x5, 250 million)

Question 10

If for every 100 pounds of income:
10% is saved
20% is taxed
20% is spent on imports

What is the MPC?

Answer 10

MPW = 0.5 and the MPC is 0.5

Question 11

Define the accelerator

Answer 11

Increase in the rate of growth in GDP leads to increased capital investment

Question 12

Why does the accelerator occur?

Answer 12

Firms become confident to invest (high animal spirits)

Question 13

When will the accelerator be low?

Answer 13

During a recession (low confidence)

Question 14

What is a negative output gap?

Answer 14

Where AS is growing faster than AD.

Question 15

In which ways can output gaps be represented?

Answer 15

Classical (straight Line) and Keynsian (curve)

Question 16

What is a positive output gap?

Answer 16

Where AD is growing faster than AS

Question 17

What does the positive output gap look like on a graph?

Answer 17

Question 18

When does a positive output gap occur?

Answer 18

During an economic boom

Question 19

Why does a positive output gap create a wider current account deficit?

Answer 19

Consumers buy more imports due to domestic supply constraints

Question 20

Give chains on how a positive output gap works

Answer 20

1. Increased demand
2. Output exceeds potential output
3. This is due to firms encouraging workers to do overtime
4. This results in a temporary increase in Real GDP and AD

Question 21

Evaluate positive output gaps

Answer 21

However, this short-term economic growth is unsustainable and leads to inflationary pressures. Output invariably returns to Yf – the level of full employment.

Question 22

When does a negative output gap occur?