Multiplier Effect Flashcards
0
Q
Multiplier Formula
A
k = (change of Y)/(change of autonomous expenditure)
k = 1/(1-z)
1
Q
Multiplier Effect
A
Measures the degree of expansionary reaction in an economy from a change in autonomous expenditure. The concept being that of the change in National Income being > the original change in Autonomous Expenditure.
The multiplier determines how much larger that change will be.
2
Q
Example of the multiplier
A
Marginal propensity to spend (z) is…
Plug into formula
Solve
3
Q
Explain reasoning
Marginal propensity to spend is .75
k = 1/(1-.75)
k = 1/.25
k = 4
A
Through the multiplier effect, 1 dollar has multiplied into $4. If z had been a smaller number then the multiplier would also have been a smaller number.
