The Multiplier Effect

Question 1

What is a positive multiplier?

Answer 1

When an initial increase in an injection (or decrease in a leakage) leads to a greater final reduction in real GDP

Question 2

What is a negative multiplier?

Answer 2

When an initial decrease in an injection (or increase in a leakage) leads to a greater final reduction in real GDP

Question 3

MPC = ?

Answer 3

Change in total consumption / Change in gross income

Question 4

Multiplier = ?

Answer 4

1/ 1 - MPC

Question 5

What are the factors affecting a high value of multiplier?

Answer 5

Marginal propensity to import and tax is low
High propensity to consume any extra income
Economy has plenty of spare capacity

Question 6

What are the factors affecting a low value of multiplier?

Answer 6

Economy is close to capacity
Propensity to import good and services is high
Higher inflation - Causes rising interest rates which then dampens other components of AD