The Multiplier Effect

Question 1

What is the multiplier effect?

Answer 1

Where an initial change in aggregate demand has a greater final impact upon equilibrium national income.

(It is the number of times a rise in national income exceeds the rise in injections of demand that caused it)

Question 2

What does an increase in investment do?

Answer 2

Sets off a chain reaction of increase in expenditures.

Question 3

The higher the propensity to consume the ………… the multiplier effect.

Answer 3

GREATER

Question 4

Is the multiplier effect low/high if the propensity to import is high?

Answer 4

LOW

Question 5

How do we calculate the multiplier effect?

Answer 5

1 - MPC

Question 6

What is the negative multiplier effect?

Answer 6

The multiplier effect works for falls in demand too.

The loss of an export order, or the cancellation of a planned investment project can have a negative multiplier effect on the regional or national economy.

Question 7

Give one disadvantage of the multiplier effect.

Answer 7

-It is based mostly upon assumption, meaning the intended/hoped for effects may not occur.
OR
-There is a time lag before it comes into effect, once this occurs, it may no longer be required.