The Multiplier (Macro)

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 increase in real GDP

Question 2

What is a negative multiplier?

Answer 2

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

Question 3

How do you calculate the multiplier?

Answer 3

1/MPW
1/marginal propensity to withdraw
Or 1/(1-MPC)
1/(1-marginal propensity to consume)

Question 4

What are the components of the marginal propensity to save?

Answer 4

Saving, taxation and imports

Question 5

What is the marginal propensity to consume?

Answer 5

How likely an individual is to consume or save an extra £1 of income received

Question 6

How do you calculate the marginal propensity to consume?

Answer 6

Change in consumption/change in income

Question 7

How does elasticity of supply affect the multiplier?

Answer 7

When AS is highly elastic the multiplier effect is likely to be high but when AS is inelastic then it is harder for AS to expand to meet rising AD

Question 8

What key factors give a high multiplier value?

Answer 8

Economy has spare capacity to meet demand
Marginal propensity to import and tax is low
High propensity to consume extra income

Question 9

What key factors give a low multiplier value?

Answer 9

Economy close to maximum capacity
Propensity to consume is high and extra demand leaks from circular flow
High inflation causes rising interest rates which dampens other components of AD