Multiplier And Accelerator Effects

Question 1

Multiplier effect

Answer 1

An initial change in aggregate demand that has a much greater final impact on the level of equilibrium national income (GDP).

Question 2

What causes the multiplier effect?

Answer 2

It’s caused by injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending leading to an expansion of output, incomes and profits.

Question 3

Positive multiplier?

Answer 3

When an initial increase injection (or decrease in leakage) leads to a great final increase in real GDP.

Question 4

Negative multiplier?

Answer 4

When an initial decrease in an injection (or an increase in a leakage) leads to a greater final decrease in real GDP.

Question 5

Marginal propensity to consume (MPC)

Answer 5

MPC=change in consumption following a change in income.

=change in total consumption/change in gross income.

Question 6

Marginal propensity to save (MPS)

Answer 6

MPS=change in savings following a change in income.

=change in total savings/change in gross income.

Question 7

Main factors that affect the value of the multiplier effect

Answer 7

• propensity to import
• propensity to save
• propensity to tax
• amount of spare capacity
• avoiding crowding out.

Question 8

Accelerator effect

Answer 8

Happens when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending.

Question 9

When will the accelerator effect be strongest?

Answer 9

• the rate change of consumer income and spending is strongly positive
• the amount of spare productive capacity for businesses is low
• the available supply of investment funds is high.