The Multiplier

Question 1

What is the Multiplier effect?

Answer 1

The multiplier effect occurs when an initial injection into the circular flow causes a bigger final increase in real national income (an increase in one component of AD will be multiplied).

Question 2

How can this be demonstrated on an AD/AS diagram?

Answer 2

Through an initial rightwards movement of the AD curve (to represent the first increase of a component) followed by another shift (to show the multiplier effect).

Question 3

Why does the multiplier effect occur?

Answer 3

Because one agents spending is another agents income.

Question 4

What is the equation for the multiplier?

Answer 4

k = change in real gdp/change in injections

Question 5

What is a negative multiplier?

Answer 5

Occurs when an initial withdrawal of spending from the circular flow leads to knock-on effects and a bigger drop in real GDP.