The Multiplier

Question 1

define the multiplier and explain an example

Answer 1

proportion by which income (sum of C + S for all periods) will rise following an initial spending change
if investment increase $10 billion causing income to rise $25b the multiplier =2.5 (final impact = 2.5 x new investment)

Question 2

describe using an example how MPC effects the multiplier

Answer 2

determines the final impact of the multiplier
if MPC = 0.6, spending = $6b savings = $0.4b, $6b will flow onto period 2 and 0.6 of this will again flow until change in income is 0.

Question 3

what are the 2 formulae for the multiplier (k)

Answer 3

k = change in Y/change in I
k = 1/1-MPC

Question 4

what happens if MPC increases and what could cause such a change

Answer 4

increase re spending from a given invetsment change will increase multiplier
changes depend on the attitudes of consumers towards spending/saving

Question 5

what defines the size of the multiplier - show the formula that could take into account these factors

Answer 5

deterimined by factors that affect MPC:
leakages - savings, tax and imports reduce multiplier
k = 1/(MPS + MPT + MPM)

Question 6

what are the limits describing the relationship between MPC and multiplier

Answer 6

1 > MPC > 0 = multiplier > 1

MPC = 1 = multiplier = infinity

Question 7

what is the average multiplier

Answer 7

between 1.5 and 2.5

Question 8

describe what happens when AE decreases

Answer 8

the decrease is multiplied to decrease income - business cycle contraction

Question 9

describe what happens when AE increases

Answer 9

the increase in AE is muliplied to increase income - expansion