Macroeconomics 1.5 Multiplier and Accelerator Flashcards
Multiplier
The extra growth in GDP which results from an initial injection into the economy.
Why does the multiplier effect occur?
Because an initial injection generates income which is then spent in the economy, creating more income which is then spent. and so on.
What factors influence the value of the multiplier?
The propensity for households to spend extra income in the economy.
What affects the tendency or propensity of households to spend in an economy?
The tendency of households to save, buy imports or the tendency for the government to charge taxes.
What does propensity mean?
Tendency
What does MPC mean?
Marginal propensity to consume- if income increases, by how much does spending increase.
What does MPS mean?
Marginal propensity to save- if income increases, by how much does saving increase?
What does MPM mean?
Marginal propensity to import- if income increases, how much does spedning on imports increase?
What does MPT mean?
Marginal propensity to pay tax- if income increases how much do tax payments increase. This can also be called the MRT (Marginal rate of tax).
What does MPW mean?
Marginal propensity to withdraw- the tendency of households to take money out of the circular flow of income.
How do you calculate MPW?
MPT+MPM+MPS
How do you calculate MPW from MPC?
1-MPC
How can you calculate the multiplier?
K= Change in real income/change in injection (G or X or I)
How can you calculate the multiplier using MPC?
1/1-MPC
How can you calculate the multiplier using MPW?
1/MPW
What is the accelerator?
When firms perceive economic growth, they increase the rate of investment in capital.
According to the acclerator theory, what does investment depend on?
Increasing economic growth
Why could the accelerator theory be considered too simplistic?
Because a range of factors influence investment decisions.
What other factors influence investment decisions?
Interest rates, availability of capital, cost of capital relative to labour, time lags in design and production of new machinery.
If there was the government saw an increase in real GDP of £6 billion and the multiplier was 3, what was the value of the initial injection?
£2 billion
If MPC was 0.7, what is MPW?
O.3
If MPS was O.2 and MPM was 0.2 and the multiplier was worth 2, what was MPT worth?
0.1 ( the MPW was 0.5)
