7.4 AD and the level of economic activity

Question 1

What is the multiplier effect?

Answer 1

The multiplier effect occurs when an initial injection into the economy, or circular flow of income causes a larger final increase in the level of real national income/output.

Question 2

What is the formula for calculating the multiplier?

Answer 2

change in real national income / change in injections

Question 3

What is the negative multiplier?

Answer 3

When the multiplier happens in reverse I.e a withdrawal from the economy.

Question 4

What does the size of the multiplier depend on?

Answer 4

MPC (marginal propensity to consume)

Question 5

If individuals have a higher MPC what effect will this have on the value of the multiplier?

Answer 5

The multiplier will have a higher value

Question 6

If individuals have a higher MPS what effect will this have on the value of the multiplier?

Answer 6

The multiplier will have a lower value

Question 7

What factors effect the size of the multiplier? (4)

Answer 7

Interest rates
Tax rates
Imports
Spare capacity