2.4.4 - the multiplier Flashcards
(15 cards)
What is the multiplier process?
An increase in AD due to an increased injection leads to an even greater increase in national income. Causes aggregate demand to increase by more than the initial increase in investment. The value of the multiplier is a ratio of a change in real income to the injection.
How is the multiplier calculated?
1/1-mpc or 1/mpw
How do interest rates affect the multiplier value?
Increased interest rates = decreased mpc = decreased multiplier.
How do taxes affect the multiplier value?
Increased taxes = increased mpt = decreased multiplier
How is the size of the multiplier determined?
Determined by how much of an increase in income people will spend, the marginal propensity to consume (mpc). The lower the leakages, the higher the mpc, the bigger the multiplier.
What is a negative multiplier effect?
A withdrawal from the economy can lead to an even further fall in income, decreasing economic growth and a decline in the economy.
What are the effects of the multiplier on the economy?
Multiplier ensures that growth can occur more quickly, as any injections lead to increased national income. If the government are trying to stimulate the economy, they give money to people with high mpc, those on low incomes. There will be a time lad between the increase in income and the full effect, as the money won’t be spent straight away. Overall effect on the economy depends on change in AD and elasticity of AS curve.
What is the marginal propensity to consume (mpc)?
The increase in consumption that follows an increase in income
What is the marginal propensity to save (mps)?
The increase in savings following an increase in income
What is the marginal propensity to tax (mpt)?
The increase in taxation following an increase in income
What is the marginal propensity to import (mpm)?
The increase in imports following an increase in income
What is the marginal propensity to withdraw (mpw)?
The increase in leakages following an increase in income (mpw = mps + mpt + mpm)
How does mpc impact the multiplier?
The higher the MPC, the bigger the multiplier as more money is transferred through the circular flow, less is withdrawn. MPC can be changed by any factor that affects consumption, as a component of AD). An increase in any other marginal propensities decreases the MPC, decreasing the multiplier.
How does the amount of spare capacity impact the size of the AD shift due to the multiplier?
There must be spare capacity in the economy for a larger increase in AD to occur, as extra output has to be produced.
How does the elasticity of AS impact the size of the AD shift due to the multiplier?
If AS is perfectly inelastic, there will only be increased price, no change in output. The more elastic the curve, the smaller the impact on price and the bigger the impact on output.
