Multiplier And Accelerator Effect Flashcards
What is the multiplier process
An initial change in AD can have a much greater final impact on the level of equilibrium national income (GDP)
What does the multiplier effect come about
Because injections of new demand for goods and services into the circular flow of income stimulates further rounds of spending leading to an expansion of output, incomes and profits.
What can the multiplier effect lead to
A bigger final effect on output and employment
What is the positive multiplier
When an initial increase in an injection (or a decrease in a leakage) leads to a greater final increase in real GDP
What is the negative multiplier
When an initial decrease in an injection (or an increase in a leakage) leads to a greater final decrease in real GDP
What is the marginal propensity to consume
Change in consumption following a change in income (change in total consumption / change in gross income)
What is the marginal propensity to save
Change in savings following a change in income (change in total savings / change in gross income)
What is a simple multiplier
Assume no tax or imports
Only leakage is saving
What is a more complex multiplier
3 leakages (savings, imports and taxation)
What are the main factors that effect the value (coefficient) or the multiplier effect
Propensity to import Propensity to save Propensity to tax Amount of spare capacity Avoid crowding out
What does the multiplier process require
That there is sufficient spare capacity for extra output to be produced.
When is the full multiplier effect unlikely to occur
Is SRAS is inelastic - because increases in AD will lead to higher prices rather than a full increase in RNO
What is crowding out
Where (for example) increased government spending or lower taxes can lead to a rise in government borrowing and/or inflation which causes interest rates to rise and has the effect of slowing down economic activity.
