Multiplier Effect Flashcards
1
Q
Multiplier effect
A
- The process by where any injection into the circular flow results in a net rise in national income that is a multiple of that initial injection
- This is because the additional money is passed around the circular flow multiple times, and income is spent (C) and passed to firms, who then pay for additional factors of production, increasing national income (Y)
- This process repeats
2
Q
Calculating the multiplier
A
- Its possible to calculate the size of the multiplier based on leakages from the circular flow
- Multiplier assumed to be constant “K”
- The value of the multiplier is 1/(1-MPC) or 1/MPW
- MPW = Marginal propensity to withdraw
- MPW = Change in consumption / Change in income
- MPC = Marginal propensity to consume
- MPC = Change in savings / Change in disposable income
