Various Definitions

Question 1

Income multiplier

Answer 1

Each time there’s an injection of new demand into the circular flow –> multiplier effect

E.g. Increase in government spending results in a more than proportionate change in national income

E.g. Money spent on building contract, or consumer expenditure

If unemployment, increase in gov expenditure will lead to more people being employed

Primary and secondary effects

Won’t continue indefinitely

Must be cash to start of with (multiplier is a reciprocal of the liquidity ratio)

LARGER THE PROPENSITY TO CONSUME, THE LARGER THR MULTIPLIER

Question 2

Investment accelerator

Answer 2

Measures how much investment increases with each successive increase in GDP

Refers to a POSITIVE effect on private fixed investment of the growth of the market economy (measured e.g. By a change in GNP)

Links to consumer wants - more investment undertaken to increase productive capacity

NOTE decelerator.
Reduction reduces the real equilibrium level of national income

Question 3

Paradox of thrift

Answer 3

States that individuals try to save more during an economic recession - essentially leads to a fall in economic growth (Keynes)

Aggregate demand and income falls, tendency to save is directly related to the amount of income received

Can be explained by analysing the place and impact of increased savings in an economy

Question 4

Structural unemployment

Answer 4

Mismatch between the skills that workers in the economy can offer vs skills demanded of works (MISMATCH. SKILLS GAP.)

More serious form of unemployment
Long term changes

3 underlying causes: reduction in demand
Technological development
Foreign competition

Regional impact (Newport, west Scotland)