The Multiplier [2.4.4] Flashcards
What is the Multiplier?
Any increase in spending (AD) leads to a larger overall increase in GDP than the initial change in spending.
This is because the initial spending impact on the CFOI results in more spending and income for others in the economy.
Size of multiplier depends on how quickly income leaks from circular flow.
How does the circular flow of income relate to the Multiplier?
Multiplier effect comes about from injections of new demand for goods and services into circular flow of income stimulated further rounds of spending
Leading to a bigger final effect on national output and total employment.
What is the positive multiplier effect?
When an initial increase in an injection leads to a greater final increase in real GDP.
What is negative multiplier effect?
When an initial decrease in an injection or increase in leakages leads to greater final decrease in real GDP
What is MPC?
Marginal propensity to consume what proportion of extra income is spent by consumers
What is MPS?
Marginal propensity to save proportion of extra income that is saved.
What is MPM?
Marginal propensity to import how much of your extra income is spent on imports
What is MPT?
Marginal propensity to tax extra tax paid on additional income.
What are the 2 calculations for the multiplier?
1/1-MPC or 1/MPS+MPT+MPM
What is the multiplier formula?
1/Marginal propensity to leak from the circular flow.
What is the simple multiplier?
Assumes no tax or imports so the only leakage is saving.
1/MPS
What is the more complex multiplier?
Three leakages (Savings imports and taxation) 1/MPS + MPT + MPM
Why would the multiplier value be high?
Economy has lots of spare capacity (negative output gap) to meet demand
MPM and tax is low
Higher MPC and extra income low MPS
Why would the multiplier value be low?
Economy is close to its capacity limits like during a boom
MPM goods and services is higher extra demand leaks from circular flow
High inflation causing rising interest rates which dapens on the components ofAD.
What would the diagrams look like showing high and low multiplier AS?
What affects the size of the fiscal multiplier?
Government capital investment like new infrastructure buildings results in higher multiplier.
What impact would a multiple increase in AD have on investment?
Often a surge in capital spending by businesses when an economy is growing quite strongly called accelerator effect.
How does accelerator effect help to explain economic cycle?
Multiplier effect boosts AD so firms see a big increase in sales
Businesses increase investment to meet this demand increase in investment have a further multiplier effect causing economy to go through a boom period.
What does a high and low multiplier mean for the economy?
High multiplier: Less stable economy, volatile to change macro policies more effective
Lower multiplier: More stable economy. Less need for macro econ policy intervention.
