Macro 13 - Multiplier Flashcards

1
Q

Define the multiplier effect

A

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

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2
Q

Define the negative multiplier effect

A

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

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3
Q

Explain the multiplier

A

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

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4
Q

What factors affect the multiplier?

A

The marginal propensity to withdraw (MPW)

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5
Q

What is the MPW - Marginal propensity to withdraw?

A

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

In the form of:
Savings, tax and imports

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6
Q

What is the formula for the MPW?

A

MPS + MPT + MPM

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7
Q

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

A

When the marginal propensity to withdraw is low.

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8
Q

What is the formulas for the multiplier?

A

1/1-MPC and 1/MPW

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9
Q

If the MPC is 0.8 then what is the multiplier?

A

5

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

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10
Q

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

What is the MPC?

A

MPW = 0.5 and the MPC is 0.5

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11
Q

Define the accelerator

A

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

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12
Q

Why does the accelerator occur?

A

Firms become confident to invest (high animal spirits)

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13
Q

When will the accelerator be low?

A

During a recession (low confidence)

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14
Q
A
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