2.4.4

Question 1

What is the multiplier effect?

Answer 1

injections of new demand for goods/services into the circular flow of income stimulate further rounds of spending

Question 2

What is the equation for total change change in real GDP?

Answer 2

Total change in real GDP = injection x multiplier

Question 2

What is the equation for Multiplier (K)?

Answer 2

Multiplier (K) =Change in real GDP (Y) / Change in injections (J)

Question 3

The bigger the multiplier, means what?

Answer 3

The bigger the change in real GDP

Question 4

When is the multiplier larger?

Answer 4

When withdrawals from the circular flow are smaller.

Question 5

Marginal propensity to consume (MPC)?

Answer 5

The proportion of additional income that is spent in the domestic economy

Question 6

Marginal propensity to import (MPM)?

Answer 6

The proportion of additional income that is spent on imports

Question 7

Marginal propensity to save (MPS)?

Answer 7

The proportion of additional income that is saved

Question 8

Marginal propensity to tax (MPT)?

Answer 8

The proportion of additional income that is paid to the government as tax

Question 9

Marginal propensity to withdraw (MPW)?

Answer 9

The proportion of additional income leaving the circular flow.

Question 10

What is the formula for the value of a multiplier in a closed economy with no government?

Answer 10

Multiplier = 1/(marginal propensity to save)
or
Multiplier = 1/(1-marginal propensity to consume)

Question 11

What is the formula for the value of the multiplier in a closed economy with government?

Answer 11

Multiplier = 1/(sum of the marginal propensity to save + marginal rate of tax)

Question 12

What is the formula for the value of the multiplier in an open economy with government?

Answer 12

Multiplier = 1/(sum of the propensities to save + tax + import)

Question 13

What is a positive multiplier?

Answer 13

When an initial increase in an injection leads to a greater final increase in real GDP

Question 14

What is a negative multiplier?

Answer 14

When an initial decrease in an injection leads to a greater final decrease in real GDP

Question 15

What factors are there which means there is a high multiplier value?

Answer 15

-Economy has plenty spare capacity to meet higher aggregate demand
-Marginal propensity to import and tax is low
-High propensity to consume any extra income

Question 16

What factors are there which means there is a low multiplier value?

Answer 16

-Economy is close to it’s capacity limits
-Propensity to import goods/services is high = extra demand leaks from circular flow.
-Higher inflation causes rising interest rates which then dampens the other components of AD