# The Multiplier Flashcards

Describe the Multiplier Effect

When injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending

Consequences of the multiplier effect

Increase in Real National Output and Total Employment

Formula for multiplier (closed economy no gov)

Multiplier = 1 / (marginal propensity to save)

Formula for Multiplier (closed economy with gov)

1 / (sum of the marginal propensity to save + marginal rate of tax)

Formula for multiplier (open economy with gov)

Multiplier = 1 / (sum of the propensities to save + tax + import)

Positive Multiplier Effect

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

Negative Multiplier Effects

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

When is there a higher multiplier value

Economy has plenty of spare capacity to meet higher AD

MP to Import and Tax is low

High propensity to consume any extra income

When is there a low multiplier value

Economy is close to its capacity limits

Propensity to import is high

Higher inflation causes rising interest rates

Formula for Marginal Propensity to Save

Change in Savings / Change in Income

Formula for Marginal Propensity to Consume

Change in Consumption / Change in Income

Formula for Marginal Propensity to Tax

Change in Taxation / Change in Income

Formula for Marginal Propensity to Impott

Change in Spending on Imports / Change in Income

Formula for Marginal Propensity to Withdraw

MPW = MPS + MPM + MPT

Effect of Multiplier on AD

Higher multiplier - injections have larger impact on National Income - AD increases by a larger amount