Multiplier Effect

Question 1

What is the multiplier process

Answer 1

The number of times a rise in national income exceeds the rise in injections of demand that caused it

Question 2

Why does the multiplier effect come around

Answer 2

Because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending leading to an expansion of output, incomes and profit

Question 3

Positive multiplier

Answer 3

An initial increase in an injection (or a decrease in a leakage) leads to a greater final increase in real GDP

Question 4

Negative multiplier

Answer 4

When an initial decrease in an injection (or an increase in a leakage) leads to a greater final decrease in real GDP.

Question 5

What is the marginal propensity to consumer (MPC)

Answer 5

A change in consumption following a change in income

Question 6

How to calculate the margins propensity to consume

Answer 6

Change in total consumption / change in gross income

Question 7

Main factors that affect the value of the multiplier effect

Answer 7

• avoiding crowding out
• amount of spare capacity
• propensity to tax
• propensity to save
• propensity to import

Question 8

What is crowding out

Answer 8

Where increased government spending or lower taxes can lead to a rise in government borrowing and/or inflation which causes interest rates to rise and has the effect of slowing down economic activity

Question 9

When will the multiplier effect be larger

Answer 9

• the propensity to spend extra income is high
• the marginal rate of tax on extra income is low
• propensity to spend rather than save is high
• consumer confidence is high
• businesses in the economy have the capacity to expand production to meet increases in demand

Question 10

When AS is highly elastic

Answer 10

The multiplier effect is likely to be high

Question 11

When AS is inelastic

Answer 11

It is harder for AS to expand to meet rising AD