Theme 2- The multiplier (key terms)

Question 1

The multiplier

Answer 1

Measures the number of times an original injection into the circular flow (or an increase in AD) is multiplied to become an even bigger increase in national output or national income
Multiplier = 1/1-MPC or 1/MPW

Question 2

MPC (marginal propensity to consume)

Answer 2

How much of an increase in household incomes is consumed or spent. The higher the MPC, the bigger the multiplier in the economy
Change in consumption / change in income

Question 3

MPS (marginal propensity to save)

Answer 3

The proportion of an increase in income that is saved instead of spent

Question 4

MPM (marginal propensity to import)

Answer 4

The proportion of any increase in income that gets spent on imports instead of domestically produced goods.

Question 5

MPT (marginal propensity to tax)

Answer 5

The proportion of additional income that is taxed

Question 6

The multiplier effect

Answer 6

Occurs when an initial injection into the circular flow causes a bigger final increase in real national income

Question 7

Accelerator effect

Answer 7

Changes in investment can be directly linked to changes in the rate of GDP growth