The multiplier 2.4.4 unit 30

Question 1

What is the multiplier effect?

Answer 1

It is an increase in investment or other injection will lead to an even greater increase in income.

Question 2

What is the marginal propensity to import (MPM)?

Answer 2

It is the increase in imports divided in income that caused them (i.eΔM/ΔY)

Question 3

What is the marginal propensity to save (MPS)?

Answer 3

It is the increase in saving divided by the increase in income that caused them (i.eΔS/ΔY)

Question 4

What is the marginal propensity to tax (MPT)?

Answer 4

It is the increase in tax revenues divided by the increase in income that caused them (i.eΔT/ΔY)

Question 5

What is the marginal propensity to withdraw (MPW)?

Answer 5

It is the increase in withdrawals from the circular flow from the the circular flow (S+T+M) divided by the increase in income that caused them (i.eΔW/ΔY)

Question 6

What is the equation for the real multiplier

Answer 6

1 1 1
—- or ————————- or —————–
MPW (MPS+MPT+MPM) 1-MPC

Question 7

Why is the multiplier effect often a difficult economic measure to use?

Answer 7

• The multiplier effect is not instantaneous so it takes time for the money to flow around the circular flow of income.
• It is to difficult measure the exact size of the multiplier effect so can be difficult to use reliably to make political policy.
• Often it has minimal effect in countries with large economies.