30 The multiplier and accelerator

Question 1

National income multiplier

Answer 1

= 1/ marginal propensity to withdraw
- The ratio of a change in equilibrium real income too the autonomous change that brought it about
- I.e an injection into the economy brings about increase in the value of national income

Question 2

The accelerator

Answer 2

The theory of investment that relates the total level of investment to the rate of change in national income
- I.e. when an increase in national income results in proportionally larger increase in investment
- investment is needed to replace or purchase new capital stock. When economic growth is positive and demand is rising firms wish to increase their productive potential and supply capacity to meet the rise in demand

Question 3

Impact of accelerator and multiplier on AD and economic cycle

Answer 3

• investment as an injection into the circular flow of income should lead to greater national income due to the national income multiplier. This rise in aggregate demand results in a higher level of investment
• national income continues to rise until the productive potential of economy is reached or the rate of economic growth slows down which cause investment to decrease
• economic growth has reached its ceiling when productive potential is reached
• economic growth has reached floor in minimum level in recession

Question 4

Calculate average propensity to consume

Answer 4

Apc= consumer expenditure / household income

Question 5

Calculate average propensity to save

Answer 5

Aps= 1-apc

Question 6

Calculate average propensity to withdraw

Answer 6

Apw=aps+apt+apm
(Save +tax+imports)

Question 7

Calculate marginal propensity to consume

Answer 7

Mpc=1-mpw

Question 8

Calculate marginal propensity to save

Answer 8

Mps=1-mpc

Question 9

Calculate marginal propensity to withdraw

Answer 9

Mpw=mps+mpt+mpm
(Save+tax+imports)

Question 10

Negative output gaps

Answer 10

Occurs when actual GDP is below Potential
- economy is not producing to its productive potential or trend rate of economic growth because there are unemployed factors of production in the economy I,e spare capacity
- policymakers has the incentive to stimulate economy though expansionary demand-side policy measures

Question 11

Positive output gaps

Answer 11

• actual GDP is above potential GDP
• only happen in the short run
• economy is producing above potential and some resources are operating beyond their normal capacity I.e labour working overtime
• in the long run, this will lead to the cost of production rising causing the short run aggregate supply curve to shift to the left
• cause GDP to return to the trend rate

Question 12

Causes of output gaps

Answer 12

• negative output gaps are caused by actual GSP being below potential GDP when factors of production are under-utilised and some resources are unemployed. Economic shocks such, as demand-side shocks I.e Covid consumers couldn’t travel to purchase goods and household incomes refill due to fall in demand
• positive output gaps are caused by actual GDP exceeding potential GDP as factors of production are employed above normal capacity

Question 13

Consequences of output gap

Answer 13

• Positive output gaps result in inflationary pressure as aggregate demand outstrips aggregate supply however they are not long-term events and there will bot be any long-term effects on GDP
• negative output gaps can signal a lack of aggregate demand which can deter firms from investing and recruiting more staff affecting employment rates
• the consequences depend on whether the cause is long term or temporary - sort term blip in demand has a different effect to a change in government policy measures that cut back expenditure