Macro 1.5 Multiplier and Acclerator Flashcards
What is the multiplier?
Ratio of a change in equilibrium real income to the autonomous change that brought it about.
What does the multiplier effect process illustrate?
A change in one of the components of AD can lead to a multiplied final change in the equilibrium level of GDP.
How is the multiplier calculated?
Multiplier = change in national income / Initial change in component of AD.
If the final rise in GDP is £300m from an initial £200m investment, what is the multiplier?
1.5.
If the final rise in GDP is £250m from an initial £200m investment, what is the multiplier?
1.25.
Define average propensity to consume.
The proportion of total income that is consumed.
Define marginal propensity to consume (MPC).
The proportion of additional income that is devoted to consumer expenditure.
Define marginal propensity to save (MPS).
The proportion of additional income that is saved by households.
Define marginal propensity to import (MPM).
The proportion of additional income that is spent on imports of goods and services.
Define marginal propensity to tax (MPT).
The proportion of additional income that is taxed.
Define marginal propensity to withdraw (MPW).
The proportion of additional income that is withdrawn from the circular flow.
How is the average propensity to consume calculated?
C/Y = consumption / income.
If household consumption is £80 and disposable income is £100, what is the average propensity to consume?
0.8.
How is the marginal propensity to consume (MPC) calculated when income changes?
MPC = change in consumption / change in income.
What is the accelerator theory of investment?
The level of planned investment varies with the rate of change in output.
What are the two types of investment firms have according to the accelerator theory?
- Investment to replace old worn out machinery
- Investment to increase capacity.
What is an output gap?
The difference between actual level of real GDP and the full employment level.
What happens during a negative output gap?
Actual GDP is less than potential GDP.
What happens during a positive output gap?
Actual GDP exceeds potential GDP.
What is the formula to calculate MPW?
MPW = MPS + MPM + MPT.
True or False: An increase in the marginal propensity to save decreases the multiplier.
True.
If a £1 billion increase in investment leads to a £5 billion increase in consumption, what is the value of the MPC?
0.8.
List three limitations of the accelerator model.
- Oversimplification of investment behavior
- Assumes constant technology
- Ignores external economic factors.
