The Multiplier

Question 1

What is the multiplier effect?

Answer 1

•An initial injection leads to a larger proportionate rise in economic growth.

E.g gov. spending, create more jobs, higher disposable income, consumption rises etc

Question 2

What is the multiplier formula?

Answer 2

K=1/MPW or K=1/(1-MPC)

•Where K= the multiplier and MPW= the marginal propensity to withdraw

Question 3

Define MPC

Answer 3

•The marginal propensity to consume.
•It is the proportion of extra income that will be consumed.

Question 4

What is MPS and what is the formula?

Answer 4

•Marginal propensity to savings.
•The proportion of any extra income that is saved by consumers.

•MPS= Change in savings/Change in income

Question 5

What is MPM and what is the formula?

Answer 5

•Marginal propensity to import.
•It is the proportion of extra income that is spent on imports.

•MPM= Change in imports/Change in income

Question 6

What is MPT and what is the formula?

Answer 6

•Marginal propensity to tax
•It is the proportion of extra income that is taxed.

•MPT= Change in tax/Change in income

Question 7

How do you calculate MPW?

Answer 7

MPW= MPS+MPT+MPM