multiplier effect and Accelerator2.4.3

Question 1

what does multiplier mean?

Answer 1

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

Question 2

e.g when AD shifts to the right and there’s an increase in national output from y1 to y2 what does the multiplier effect state?

Answer 2

the multiplier effect states that the actual level of growth does not stop there, any increase in spending by AD it will create income for someone else which will facilitate further spending by those people-it’s a continuous cycle.

Question 3

what is the equation to calculate the multiplier?

Answer 3

1/ 1-mpc

Question 4

what range of values does MPC take?

Answer 4

from 0 to 1

• where 0 represents that none of that pound is being spent
• where 1 represents 100% of that extra pound is spent

Question 5

what is another way to calculate MPC

Answer 5

1/mpw

MPW-consists of MPS,MPT,MPM

Question 6

why is the marginal propensity to withdraw is used?

Answer 6

this is because instead of consuming some may decide to save,import or it’s spent on taxes- so in other words how much are you taking from the economy.

Question 7

what is an example of how the multiplier works-gov?

Answer 7

For instance, the government decides to spend 100 million on a school
-building the school requires many companies like the construction company they take 50 million out of this budget
-so the construction company will spend 70% of its fee and save 30%
to calculate the MPC you do 1/0.3 which is the marginal propensity to save
but that 70% is spread through painters and cement they have to spend that remaining on necessities and food-this cycle continues.

Question 8

What would the diagram look like for a multiplier?

Answer 8

label the x-axis as real GDP
label the y-axis as price
-draw a LRAS curve
-then draw an AD curve
-draw a dotted line down presenting y1 and across as p1
-then show a shift from AD1 to AD2 and show how y1 increases to y2 and p1 to p2
-but remember the multiplier effect does not stop there it increases to AD3 and show the increase in price and real GDP

Question 9

define the accelerator effect?

Answer 9

changes in investment can be directly linked to change in the rate of GDP growth

Question 10

what determines MPC?

Answer 10

• if there is a culture of saving then MPC will fall and this will lead to the multiplier value decreasing
• if taxation levels are high it will reduce the multiplier effect
• if the marginal propensity to import is high it will reduce the multiplier effect

Question 11

what is the role of the accelerator effect?

Answer 11

it only looks into investment and firms spending money

Question 12

how does the accelerator effect work

Answer 12

well, when there is high demand in the economy firms will have the incentive to expand their business this is because they are seeing a rise in GDP growth which means they are more likely to invest.
-but if they are seeing the GDP rates are low they will cut expenditure and not invest