2.4.3 & 2.4.4 Equilibrium Levels Of Real National Output & The Multiplier

Question 1

The multiplier ratio

Answer 1

the ratio of a change in equilibrium real income to the autonomous change (injection) that brough it about

Question 2

The multiplier ratio example

Answer 2

a £1m injection into the circular flow results in a £2m increase in national income
- the value of the multiplier is 2

Question 3

The multiplier process (injections)

Answer 3

• an injection into the CFI e.g export = immediate increase in AD but some of the extra income raised by selling goods will be spent in the economy
• whatever is not withdrawn from the CFI will cause second round increases in AD = further rounds of income and spending

Question 4

Multiplier effects of withdrawals

Answer 4

• when injection decrease, the process works in reverse
• there will be a downward multiplier effect

Question 5

Factor determining the size of the multiplier

Answer 5

• the size of the withdrawals from the CFI
• the proportion of money from the additional income saved by households
• the proportion of money spent on imported goods
• the proportion of money paid as taxes to the govt

Question 6

Export multiplier effect

Answer 6

a fall in exports= reduced AD and will affect GDP, jobs and investments

Question 7

Why are export industries important?

Answer 7

many industries rely heavily on key export industries remaining competitive e.g transportation, trade finance businesses (insurance), service businesses that operate in airports

Question 8

Export multiplier effect example

Answer 8

• decrease exports = decrease consumption because decreased jobs and income
• decrease imports since these businesses have no profit or demand so no inclination to invest

Question 9

Circular flow of income and AD

Answer 9

• an increase in any of the components of AD will lead to a rise in the CFI

Question 10

The multiplier formula

Answer 10

• K = MPW
• K + 1/(1-MPC) - K is the multiplier

Question 11

MPW

Answer 11

the marginal propensity to withdraw

Question 12

Multiplier and MPC & MPW

Answer 12

• multiplier is greater if MPC is higher & MPW is lower

Question 13

The marginal propensity to consume (MPC)

Answer 13

the proportion of a change in income (the margin) that will be spent on consumption rather than being saved. If income increases by £100 and the MPC is 0.7 then £70 of the increase in income will be spent on consumption

Question 14

What affects the MPW?

Answer 14

• Marginal propensity to withdraw
• Marginal propensity to tax
• marginal propensity to import

Question 15

Why can Marginal propensity to supply affect Marginal propensity to withdraw?

Answer 15

interest rates are high, then consumption may not rise significantly as additional income may be saved rather than spent

Question 16

Why can Marginal propensity to supply affect Marginal propensity to tax?

Answer 16

Taxes = a withdrawal from the CFI - high tax rates are high = less disposable income - less consumption of goods and services

Question 17

Why can Marginal propensity to supply affect Marginal propensity to import?

Answer 17

• In the UK, we have a high propensity to consume imports - increases in disposable income, = increased spending on imported goods, = withdrawal from the CFI and national income would not rise as much as anticipated

Question 18

Is the multiplier effect a good thing?

Answer 18

when govt try to increase AD it may increase more than planned but this can lead to inflation