The Multiplier

Question 1

Define the National Income Multiplier

Answer 1

An initial injection into the economy causes a bigger increase in the national income

Question 2

7 factors of the multiplier

Answer 2

1. MPC
2. APC
3. MPS
4. APS
5. MPT
6. MPM
7. Spare Capacity

Question 3

Explain why an economy with a larger spare capacity leads to a larger multiplier

Answer 3

A larger spare capacity means an injection will lead to a larger increase in output and therefore an increase in the national income multiplier. If there was no spare capacity there would be no increase, as it cannot grow. E.G. look at LRAS diagram.

Question 4

Define Output Gap

Answer 4

The difference between the actual level of output and the potential level of output in an economy

Question 5

Define negative output gap

Answer 5

When the actual level of output is below the potential level of output. Therefore resources not being used to full potential. Allocatively innefficient

Question 6

Define positive output gap

Answer 6

When the actual level of output is higher than the potential level of output. Therefore resources being overused. Not good. May lead to bust in economic cycle.