The Multiplier, The Accelerator, Marginal Propensities & Output gaps- MM Flashcards
When does the multiplier effect occur?
When an initial change in aggregate demand has a greater final impact on the equilibrium national income
What does fiscal relate to?
Government spending (G) & taxation (T)
What does the accelerator theory state?
An increase in real GDP will often lead to a proportionally higher increase in private sector investment (I)
How can the accelerator theory be explained?
Greater levels of business confidence
What is the most sensitive/volatile component of AD?
Investment (I)
What do injections create?
New income, expenditure & product
What do leakages do to the size of a multiplier?
Reduce it
What two ways can be used to calculate the multiplier?
1/1-MPC or 1/MPW
What does P stand for?
Propensity (likelihood, tendency)
How do you calculate average propensity to consume (APC)?
APC=C/Y
What does average propensity to consume (APC) show?
The % of income that consumers tend to spend
What does average propensity to save (APS) show?
The % of income we save
How do you calculate average propensity to save (APS)?
S/Y
What does average propensity to tax (APT) show?
% of incomes paid in taxation
How do you calculate average propensity to tax (APT)?
T/Y
What does average propensity to import (APM) show?
% of income spent on imports
How do you calculate average propensity to import (APM)?
M/Y
What does APC+APS+APT+APM equal?
1
How do you calculate marginal propensity to consume (MPC)?
ΔC/ΔY
How do you calculate marginal propensity to save (MPS)?
ΔS/ΔY
How do you calculate marginal propensity to tax (MPT)?
ΔT/ΔY
How do you calculate marginal propensity to import (MPM)?
ΔM/ΔY
What are the 4 options households have with their change in income?
Consume, save, pay more tax or import
What does MPC+MPS+MPT+MPM equal?
1
Why is C different to S,T & M?
C increases Real GDP, leakages reduce it
What are S,T & M now referred to as?
Withdrawals from the circular flow of income
How do you calculate the marginal propensity to withdraw (MPW)?
MPS+MPT+MPM
What does MPC+MPW equal?
1
What is the multiplier effect about?
Consumer spending- extra spending when AD ↑
What is the accelerator effect about?
Firm spending- investment (I)
What does a higher MPW do to MPC and the multiplier?
↓ MPC, ↓ Multiplier
What does the size of a multiplier depend on?
Level of leakages from the system
What 3 factors may affect leakages and how?
1) Interest rates- ↑ IR = ↑ Savings
2) Tax levels- ↑ Tax = ↑ Taxation
3) Exchange rate- SPICED- ↑ rate= ↑ imports
How is the multiplier effect demonstrated on a diagram?
AD curve shifts right again after initial shift (AD1-AD2-AD3)
How can another shift in AD be determined by the accelerator effect?
Increase in real GDP initially can boost business confidence- ↑ investment (I)
How can a negative output gap be demonstrated on a diagram?
LRAS curve higher than equilibrium (Pl1, Y1)
Why does a negative output gap occur?
When resources are not being fully employed in the economy
What does an increase in AD do to a negative output gap?
Decreases the size of it- fewer unemployed resources
How can a positive output gap be demonstrated on a diagram?
LRAS curve lower then equilibrium (PL1, Y1)
Why does a positive output gap occur?
Resources are over-employed (at a unsustainable level)
What will a shift right in AD cause when there is a positive output gap?
Inflation
How can full employment (Yfe) be shown on a PPF diagram?
A point on the curve
How can a negative output gap be shown on a PPF diagram?
A point inside the curve
How can a positive output gap be shown on a PPF diagram?
A point outside the curve
