Multiplier Effect

Question 1

What is the multiplier effect

Answer 1

When an initial injection into the circular flow causes a bigger final increase in national income

Question 2

What does the multiplier effect lead to…

Answer 2

Stimulates further round of spending
Bigger effect on output and employment
Money is circulated around the economy

Question 3

Formula for MPC

Answer 3

Formula for Marginal Propensity to Consume:

Change in consumption / Change in income

Question 4

What reduces the size of the multiplier

Answer 4

Withdrawals
Leakages:
1) Savings
2) Taxes
3) Imports

Question 5

The higher the leakages…

Answer 5

the smaller the size of the multiplier

Question 6

MPT and MPM

Answer 6

= Marginal Propensity to tax
= Marginal Propensity to import

Question 7

MPT is…

Answer 7

Measure of proportion of an increase in income taken in tax

Question 8

MPM is…

Answer 8

The proportion of an increase in income that is withdrawn

Question 9

Total proportion of an increase in income thats withdrawn =

Answer 9

MPW (marginal propensity to withdraw) = MPS + MPT + MPM

Question 10

2 ways to calculate multiplier:

Answer 10

1/(MPS + MPT + MPM)

or 1/MPW

or 1/(1-MPC)

Question 11

On are AD successive shifts smaller and smaller as AD shifts to A2 and etc.. due to multiplier effect

Answer 11

Due to money being leaked out with every trip round the circular flow