The Multiplier

Question 1

What is the Multiplier?

Answer 1

Number of times a rise in national income exceeds the rise in injections//
Where an increase or decrease in Aggregate Demand leads to a larger final change in National Income

Question 2

What principle is the multiplier process based on?

Answer 2

One person’s spending becomes another person’s income within the circular flow of income

Question 3

What happens if there is an additional injection into the circular flow?

Answer 3

National income will increase by more than the additional income

Question 4

What is the additional income of firms spent on?

Answer 4

Wages and other factor incomes so becomes new income to households who own the factors of production

Question 5

What is the multiplier ratio?

Answer 5

Multiplier (k) = 1/(1-MPC) = 1/MPS

Question 6

How do you work out change in income?

Answer 6

Multiplier (k) X Change in injection into circular flow

Question 7

What is the Marginal Propensity to Import (MPM)?

Answer 7

Proportion of change in disposable income which is spent on imports

Question 8

How do you work out the Marginal Propensity to Import (MPM)?

Answer 8

MPM = △ in Imports (M) ÷ △ in Real Income (Yd)

Question 9

What is the Marginal Propensity to Tax (MPT)?

Answer 9

Proportion of change in income which is paid in tax

Question 10

How do you work out the Marginal Propensity to Tax (MPT)?

Answer 10

MPT = △in Tax (T) ÷ △ in Income (Y)

Question 11

What are withdrawals from the Circular Flow of Income?

Answer 11

Tax
Imports
Savings

Question 12

How do you work the Marginal Propensity to Withdraw (MPW)?

Answer 12

MPS+MPT+MPM

Question 13

How do you work out the multiplier using the MPW?

Answer 13

1/MPW OR 1/(MPS+MPT+MPM)

Question 14

What are the effects of the economy on the multiplier?

Answer 14

Depends on:
MPT and MPM
MPS
Spare capacity in Economy

Question 15

What effect does MPT and MPM have on the multiplier?

Answer 15

Both relatively high in UK making value of multiplier low

Question 16

What effect does MPS have on the economy?

Answer 16

Relatively low for UK but changes over time eg. due to consumer confidence, interest rates

Question 17

What effect does space capacity have on economy if AS is inelastic?

Answer 17

If AS is inelastic - increases in AD leads to higher prices rather than increase in real national output

Question 18

What effect does space capacity have on economy if AS is perfectly elastic?

Answer 18

If AS is perfectly elastic - rise in AD causes large increase in national output