Multiplier Effect

Question 1

Multiplier Effect Definition

Answer 1

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

Question 2

Multiplier Effect Equations

Answer 2

1/1-MPC
1/MPS + MPT + MPM
1/MPW

Question 3

Marginal Propensity to Consume Definition

Answer 3

Change in Consumption/Change in Income

Question 4

Factors that reduce the size of the Multiplier

Answer 4

1. Savings.
2. Taxes.
3. Imports.

Question 5

Marginal propensity of Withdrawals Components

Answer 5

1. Marginal Propensity to Save.
2. Marginal Propensity to Tax.
3. Marginal Propensity to Import.

Question 6

Marginal Propensity to Save Definition

Answer 6

Measures the proportion of an increase in income is saved.

Question 7

Marginal Propensity to Tax Definition

Answer 7

Measures the proportion of an increase in income taken in tax.

Question 8

Marginal Propensity to Import Definition

Answer 8

The proportion of an increase in income spent on imports.

Question 9

MPW Calculation

Answer 9

MPW = MPS + MPT + MPM

Question 10

Factors Affecting the Size of the Multiplier

Answer 10

1. Interest Rates
2. Taxation Rates
3. Imports
4. Spare Capacity
5. Confidence
6. Income Levels

Question 11

How Interest Rates affect the Size of the Multiplier

Answer 11

If interest rates are high, then consumption may not rise significantly as additional income may be saved, which is a withdrawal from the circular flow of income and national income would not rise as much as anticipated.

Question 12

How Taxation Rates affect the Size of the Multiplier

Answer 12

If taxation rates are high then consumers will have less disposable income with which to consume goods and services.

Question 13

How Imports affect the Size of the Multiplier

Answer 13

• High propensity to consume imports in the UK.
• If increases in disposable income, but this is spent on imports, then it counts as a withdrawal.

Question 14

How Spare Capacity affects the Size of the Multiplier

Answer 14

• If there is very little spare capacity, an increase in aggregate demand may not be able to be met by firms.

Question 15

How Confidence affects the Size of the Multiplier

Answer 15

High confidence will encourage people to spend, raising the MPC, whereas low confidence will lead to a lesser MPC and lower multiplier.

Question 16

How Income Levels affect the Size of the Multiplier

Answer 16

• If income levels are low, then MPC is likely to be quite high, whereas high income levels will likely lead to low MPC and high MPS.