LS7- The Multiplier

Question 1

The multiplier effect

Answer 1

Injections into the circular flow of income lead to even larger increases in the national income of an economy

The final change in real GDP/ initial change in AD

Question 2

Marginal propensity to save

Answer 2

MPS- proportion of any extra income that is saved
MPS= change in savings/ change in income
MPC + MPS = 1

Question 3

Marginal propensity to consume

Answer 3

MPC- proportion of extra income that is spent
MPC = change in consumption/ change in income
MPC + MPS = 1

Question 4

Marginal propensity to tax and import

Answer 4

MPT- proportion of extra income that is paid as taxes = change in taxation/ change in income
MPM- proportion of extra income that is spent on imports = change in spending on imports/ change in income

Question 5

Marginal propensity to withdraw

Answer 5

MPW= MPS + MPM + MPT
Multiplier = 1/ MPW