The multiplier 2.4.4

Question 1

what is the idea of the multiplier process.

Answer 1

the idea id that an increase in AD is because of an increases injections (exports, government spending, investments)

Question 2

what happens if the injections increases in the circular flow of income

Answer 2

there would be a larger final change in the total spending of an economy

Question 3

what happens if the leakages increases in the circular flow of income

Answer 3

if the leakages increases, then the multiplier effects will be smaller, For example when the 2008 recession hit the UK, the saving ratios lose markedly reducing the multiplier effect

Question 4

What are the effects of the multiplier on the economy

Answer 4

• Multiplier means that the growth can occur quicker, as any injections lead to a bigger increase in national income. injection can be targeted to those who have the biggest MPC in order to increase the size of the multiplier.
• However there would be a time lag between the increase in income and the full effect of that increases as not everyone will spend the money straight away.

Question 5

Marginal Propensity to Consume MPC

Answer 5

the increase in consumption following an increase in income

Question 6

Marginal Propensity to Save MPS

Answer 6

the increase in savings following an increase in income

Question 7

Marginal Propensity to Tax MPT

Answer 7

the increase in taxation following an increase in income.

Question 8

Marginal Propensity to Import MPM

Answer 8

the increase in imports following an increase in income

Question 9

formula for the multiplier

Answer 9

1/(1 - MPC)