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A-Level Economics Year 1 > The Multiplier, The Accelerator, Marginal Propensities & Output gaps- MM > Flashcards

The Multiplier, The Accelerator, Marginal Propensities & Output gaps- MM Flashcards

1
Q

When does the multiplier effect occur?

A

When an initial change in aggregate demand has a greater final impact on the equilibrium national income

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2
Q

What does fiscal relate to?

A

Government spending (G) & taxation (T)

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3
Q

What does the accelerator theory state?

A

An increase in real GDP will often lead to a proportionally higher increase in private sector investment (I)

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4
Q

How can the accelerator theory be explained?

A

Greater levels of business confidence

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5
Q

What is the most sensitive/volatile component of AD?

A

Investment (I)

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6
Q

What do injections create?

A

New income, expenditure & product

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7
Q

What do leakages do to the size of a multiplier?

A

Reduce it

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8
Q

What two ways can be used to calculate the multiplier?

A

1/1-MPC or 1/MPW

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9
Q

What does P stand for?

A

Propensity (likelihood, tendency)

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10
Q

How do you calculate average propensity to consume (APC)?

A

APC=C/Y

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11
Q

What does average propensity to consume (APC) show?

A

The % of income that consumers tend to spend

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12
Q

What does average propensity to save (APS) show?

A

The % of income we save

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13
Q

How do you calculate average propensity to save (APS)?

A

S/Y

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14
Q

What does average propensity to tax (APT) show?

A

% of incomes paid in taxation

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15
Q

How do you calculate average propensity to tax (APT)?

A

T/Y

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16
Q

What does average propensity to import (APM) show?

A

% of income spent on imports

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17
Q

How do you calculate average propensity to import (APM)?

A

M/Y

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18
Q

What does APC+APS+APT+APM equal?

A

1

19
Q

How do you calculate marginal propensity to consume (MPC)?

A

ΔC/ΔY

20
Q

How do you calculate marginal propensity to save (MPS)?

A

ΔS/ΔY

21
Q

How do you calculate marginal propensity to tax (MPT)?

A

ΔT/ΔY

22
Q

How do you calculate marginal propensity to import (MPM)?

A

ΔM/ΔY

23
Q

What are the 4 options households have with their change in income?

A

Consume, save, pay more tax or import

24
Q

What does MPC+MPS+MPT+MPM equal?

A

1

25
Q

Why is C different to S,T & M?

A

C increases Real GDP, leakages reduce it

26
Q

What are S,T & M now referred to as?

A

Withdrawals from the circular flow of income

27
Q

How do you calculate the marginal propensity to withdraw (MPW)?

A

MPS+MPT+MPM

28
Q

What does MPC+MPW equal?

A

1

29
Q

What is the multiplier effect about?

A

Consumer spending- extra spending when AD ↑

30
Q

What is the accelerator effect about?

A

Firm spending- investment (I)

31
Q

What does a higher MPW do to MPC and the multiplier?

A

↓ MPC, ↓ Multiplier

32
Q

What does the size of a multiplier depend on?

A

Level of leakages from the system

33
Q

What 3 factors may affect leakages and how?

A

1) Interest rates- ↑ IR = ↑ Savings
2) Tax levels- ↑ Tax = ↑ Taxation
3) Exchange rate- SPICED- ↑ rate= ↑ imports

34
Q

How is the multiplier effect demonstrated on a diagram?

A

AD curve shifts right again after initial shift (AD1-AD2-AD3)

35
Q

How can another shift in AD be determined by the accelerator effect?

A

Increase in real GDP initially can boost business confidence- ↑ investment (I)

36
Q

How can a negative output gap be demonstrated on a diagram?

A

LRAS curve higher than equilibrium (Pl1, Y1)

37
Q

Why does a negative output gap occur?

A

When resources are not being fully employed in the economy

38
Q

What does an increase in AD do to a negative output gap?

A

Decreases the size of it- fewer unemployed resources

39
Q

How can a positive output gap be demonstrated on a diagram?

A

LRAS curve lower then equilibrium (PL1, Y1)

40
Q

Why does a positive output gap occur?

A

Resources are over-employed (at a unsustainable level)

41
Q

What will a shift right in AD cause when there is a positive output gap?

A

Inflation

42
Q

How can full employment (Yfe) be shown on a PPF diagram?

A

A point on the curve

43
Q

How can a negative output gap be shown on a PPF diagram?

A

A point inside the curve

44
Q

How can a positive output gap be shown on a PPF diagram?

A

A point outside the curve

A-Level Economics Year 1 (10 decks)

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