Th2.4: The Multiplier Process and Ratio

Question 1

What is the multiplier process?

Answer 1

the idea that an increase of AD because of an increased injection can lead to a further increase in national income

Question 2

It is the ratio of…

Answer 2

the final change in income to the initial change in injection

Question 3

What will the initial injection represent?

Answer 3

an increase in spending and will increase income for someone else which will then lead to further consumption spending

Question 4

What will the size of the multiplier be determined by?

Answer 4

how much of an increase in income people will spend - the marginal propensity to consume

Question 5

The lower the leakages…

Answer 5

the higher the MPC, the bigger the multiplier

Question 6

How is the multiplier able to work…

Answer 6

due to the concept of the circular flow of income, since one person’s spending is another’s income

Question 7

What does the multiplier tend to be in the long run for developed countries, as calculated by the IMF?

Answer 7

1.5

Question 8

What does the multiplier tend to be in the long run for developing countries, as calculated by the IMF?

Answer 8

1.6

Question 9

A negative multiplier effect can also occur, this being…

Answer 9

a withdrawal from the economy could lead to an even further fall in income, decreasing economic growth and possibly leading to a decline in an economy

Question 10

So if the government plans to cut deficits…?

Answer 10

it will lead to an even further decrease of the economy