Multiplier Effect & Accelerator

Question 1

What is the multiplier effect?

Answer 1

The process in which any change in the components of AD will lead to an even greater change in national output

Question 2

How does the multiplier effect work?

Answer 2

When extra money is out in the economy, it creates more income which is then spent and generates more income and so on…

Question 3

What is the formula for the multiplier?

Answer 3

1 1
——— Or ————
1 - MPC MPW

Question 4

What is the formula for MPW (marginal propensity to withdraw)?

Answer 4

MPS (save) + MPT (tax) + MPM (imports)

Question 5

What is the marginal propensity of consumers?

Answer 5

The willingness of households to spend extra income they earn

Question 6

What is the accelerator theory?

Answer 6

If rate of GDP increases, AD increases

If rate of GDP decreases, AD decreases

Question 7

If rate of GDP increases, why does AD increase?

Answer 7

Firms are more willing to invest which speeds up GDP growth