The Multiplier Flashcards
What is the multiplier effect?
The multiplier effect occurs when an initial injection into the circular flow causes a bigger final increase in real national income
What is the process by which the multiplier effect takes place?
The multiplier process is when an initial increase in spending occurs, and so leads to further rounds of spending, amplifying the initial effect on national income
How does the multiplier effect affect the economy?
The multiplier amplifies the impact of fiscal policy, affecting total output, employment, and national income
What is the marginal propensity to consume?
The proportion of additional income spend on consumption
What is the marginal propensity to save?
The proportion of additional income that is saved
What is the marginal propensity to tax?
The proportion of additional income paid as taxes
What is the marginal propensity to import (MPM)?
The proportion of additional income spent on imports
How does the marginal propensity to consume affect the multiplier?
A higher MPC manes that a larger proportion of additional income is spent, which boosts demand in the economy. This amplifies the multiplier effect
What is the marginal propensity to withdraw?
The marginal propensity to withdraw is made up of all the components of withdrawal. These are savings, taxes, and imports
What are the formulas for the multiplier?
1 /// 1 - MPC
1 /// MPS
1 /// MPW
What is the formula for national income increase after the multiplier?
National Income Increase ===
Multiplier *** Injection
What effect does the marginal propensity to save have on the multiplier?
A higher marginal propensity to save reduces the size of the multiplier because more income is saved rather than spent. Therefore, demand decreases
