multiplier effect

Question 1

what is the multiplier effect

Answer 1

The multiplier effect states that an initial investment (usually by the government) leads to increased consumption spending and so results in an increase in national income greater than the initial amount of spending.

Question 2

what is the multiplier?

Answer 2

The multiplier is the number of times larger the change in income is compared to the change in net injections that caused it.

Question 3

what is an example of the multiplier effect?

Answer 3

For example, if a government spent on road construction, money will go to builders in wages. These builders spend some additional income on for example clothes, and also save some. The clothes seller earns more money, and spends some of this. The effect goes on.

Question 4

what determines the size of the multiplier?

Answer 4

The leakages present along the way.

For example, if the builder saved all of the money (N.B. saving = leakage), the multiplier effect would be very small. Similarly, if he had to pay it all to the government in the form of tax, or if he spent it all on foreign goods, the money would be lost from the economy.

Question 5

what is the marginal propensity to consume?

Answer 5

Marginal Propensity to Consume-­‐ proportion of extra disposable income used for consumption

Question 6

what is the marginal propensity to withdraw

Answer 6

Marginal Propensity to Withdraw-­‐ proportion of extra disposable income used to save, pay tax and import goods