The Multiplier

Question 1

When is the multiplier low?

Answer 1

1.When economy is using lots of its capacity and has little to spare
2.MPM is high- leakages from components of AD( AD decrease)
3.Higher inflation causes rising interest which decrease AD

Question 2

When is the multiplier high?

Answer 2

1.When economy has lost of spare capacity- it can meet high AD
2.MPM and MPI are low- import leakage (less imports)
3.High MPC
4.Low MPS

Question 3

Equation for MPS

Answer 3

Change in saving/change in gross income

^S/^Y

Question 4

Equation for MPC

Answer 4

Change in consumption/ change in gross income

Question 5

What is MPT?

Answer 5

Marginal propensity to tax.

Proportion of additional income that is taxed.

Question 6

What is MPS?

Answer 6

Marginal propensity to save

Proportion of additional income that is saved.

Question 7

What is MPM?

Answer 7

Mariginal propensity to import.

Proportion of additional income spent on imports.

Question 8

What is MPC

Answer 8

Marginal propensity to consume.

Proportion of additional income that is spent in an economy.

Question 9

Multiplier formula in an open economy.

Answer 9

1/ (MPS + MPM + MPT)

Question 10

Multiplier formula in closed economy

Answer 10

1/MPS

1/1-MPC

Question 11

Multiplier ratio formula

Answer 11

Total change in real gdp= injection x multiplier

Question 12

Definition of the multiplier effect.

Answer 12

A change in it leads to multiplied final changes in the equilibrium of GDP.