4. The Multiplier and Accelerator

Question 1

What is the Multiplier effect?

Answer 1

The multiplier effect occurs when an injection (e.g. G) into the economy, can lead to a bigger final increase in Real GDP.

Question 2

How do you calculate the size of the multiplier?

Answer 2

1/1- MPC

Question 3

What is the Accelerator effect?

Answer 3

The accelerator effect: an increase in national income results in a proportionately larger rise in investment

Question 4

How are the Multiplier and Acceleration effects linked?

Answer 4

An injection causes the multiplier effect to help increase C . This effect is then “accelerated” by increased I. If national income is growing at an increasing rate then net investment will also grow, but even more rapidly (providing business confidence is high) leading to strong rise in real GDP.