Full AE model + Multiplier

Question 1

Autonomous change

Answer 1

Any autonomous change is caused by a factor other than a change in the level of income
It is independent of the level of income

Question 2

Induced change

Answer 2

Related to a change in the level of income

Question 3

Multiplier effect

Answer 3

Any autonomous change in a component of AE will lead to a change in the level of economic activity greater than the initial autonomous change

Question 4

What an autonomous change leads to

Answer 4

An autonomous increase in a component of AE leads to an upward shift of the AE curve. Causing a new equilibrium level of income and output to be established at a higher level of economic activity

Question 5

Reference to model

Answer 5

A movement from AE to AE1 resulting in an increase in the equilibrium level of income from Ye to Ye1

Question 6

Relation to the multiplier

Answer 6

This increase in economic activity is greater than the initial autonomous change in spending as it creates income for individuals and firms in the economy who will save some of the income and save the rest
This increase in spending generates rounds of income and induced consumption spending as one mans spending becomes another mans income

Question 7

Reference to multiplier model

Answer 7

The initial autonomous change in AE is represented by a-b. This leads to extra income for individuals and firms b-ç some of which is spent or saved
At each stage, the extra spending is reduced due to the withdrawal or leakage of saving until a new equilibrium is established

Question 8

Multiplier formula

Answer 8

K= 1/MPS

Question 9

Full five sector formula

Answer 9

K= 1/MPS + MPT + MPM

Question 10

Multiplier definition

Answer 10

Is the amount by which real income or GDP changes after an initial change in expenditure