Macroeconomics 1.5 Multiplier and Accelerator

Question 1

Multiplier

Answer 1

The extra growth in GDP which results from an initial injection into the economy.

Question 2

Why does the multiplier effect occur?

Answer 2

Because an initial injection generates income which is then spent in the economy, creating more income which is then spent. and so on.

Question 3

What factors influence the value of the multiplier?

Answer 3

The propensity for households to spend extra income in the economy.

Question 4

What affects the tendency or propensity of households to spend in an economy?

Answer 4

The tendency of households to save, buy imports or the tendency for the government to charge taxes.

Question 5

What does propensity mean?

Answer 5

Tendency

Question 6

What does MPC mean?

Answer 6

Marginal propensity to consume- if income increases, by how much does spending increase.

Question 7

What does MPS mean?

Answer 7

Marginal propensity to save- if income increases, by how much does saving increase?

Question 8

What does MPM mean?

Answer 8

Marginal propensity to import- if income increases, how much does spedning on imports increase?

Question 9

What does MPT mean?

Answer 9

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).

Question 10

What does MPW mean?

Answer 10

Marginal propensity to withdraw- the tendency of households to take money out of the circular flow of income.

Question 11

How do you calculate MPW?

Answer 11

MPT+MPM+MPS

Question 12

How do you calculate MPW from MPC?

Answer 12

1-MPC

Question 13

How can you calculate the multiplier?

Answer 13

K= Change in real income/change in injection (G or X or I)

Question 14

How can you calculate the multiplier using MPC?

Answer 14

1/1-MPC

Question 15

How can you calculate the multiplier using MPW?

Answer 15

1/MPW

Question 16

What is the accelerator?

Answer 16

When firms perceive economic growth, they increase the rate of investment in capital.

Question 17

According to the acclerator theory, what does investment depend on?

Answer 17

Increasing economic growth

Question 18

Why could the accelerator theory be considered too simplistic?

Answer 18

Because a range of factors influence investment decisions.

Question 19

What other factors influence investment decisions?

Answer 19

Interest rates, availability of capital, cost of capital relative to labour, time lags in design and production of new machinery.

Question 20

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?

Answer 20

£2 billion

Question 21

If MPC was 0.7, what is MPW?

Answer 21

O.3

Question 22

If MPS was O.2 and MPM was 0.2 and the multiplier was worth 2, what was MPT worth?

Answer 22

0.1 ( the MPW was 0.5)