the multiplier

Question 1

definition of the multiplier

Answer 1

the ratio of the change in income caused by a change in spending

Question 2

what is the value of the multiplier determined by?

Answer 2

MPC

Question 3

effect of a change in investment component of AE?

Answer 3

does not have a once off impact on the economy. any addiction or reduction in the level of AE will have far reaching effects on the aggregate level of output and income
therefore, any change in I results in a multiplied change in Y and O

Question 4

multiplier coefficient formula

Answer 4

K = 1/MPS

Question 5

change in income formula

Answer 5

K x change in I

Question 6

change in output formula

Answer 6

K x change in I

Question 7

what determines the size of the multiplier?

Answer 7

MPC and MPC

Question 8

when will the multiplied effect by greater?

Answer 8

when MPC rises or MPS falls

Question 9

what will cause a multiplied decrease in income?

Answer 9

a fall in investment, government spending or exports

Question 10

formula for complex multiplier

Answer 10

K = 1/(MPS+MPT+MPM)

Question 11

what are the macroeconomic policy objectives?

Answer 11

• sustainable econ growth
• price stability
• full employment
• productivity and efficient allocation
• equitable redistribution of income

Question 12

what is the definition of sustainable economic growth?

Answer 12

the increasing capacity of an economy to satisfy the material needs and wants of the population

Question 13

what is the target for growth?

Answer 13

3-4%

Question 14

what occurs with growth of less than 2%?

Answer 14

• difficult to achieve full employment
• represents an economy operating below full capacity
• cyclical unemployment, incomes, living standard and production levels decrease

Question 15

what occurs with growth above 5%?

Answer 15

• leads to inflation due to higher demand for goods, services and resources
• not sustainable due to resource depletion, production bottlenecks, inflationary pressure and supply side constraints

Question 16

economic growth equation

Answer 16

(GDP 2 - GDP 1) / GDP 1 X 100

Question 17

why is growth seen as the most important objective?

Answer 17

helps the economy to achieve other macroeconomic goals and improve living standards

Question 18

what are the effects of high inflation?

Answer 18

places pressure on interest rates, reduces demand for goods and services as it reduces purchasing power if incomes do not rise in line with price rises, increase in production costs, decreases consumer and business confidence and discourages productive investment from firms

Question 19

what are the effects of low inflation?

Answer 19

maintains the value of money, protects savings, helps keep interest rates low, promotes international competitiveness and reduces uncertainty for decision makers facing an uncertain future

Question 20

inflation equation

Answer 20

(CPI 2 - CPI 1) / CPI 1 X 100

Question 21

what is headline inflation?

Answer 21

• the main measure of inflation as reported in the media
• can be a distorted measure of inflation due to the inclusion of items with high price fluctuations as well as one off events

Question 22

what is underlying inflation?

Answer 22

provides a more genuine and accurate representation of inflation by excluding once off and volatile items

Question 23

what are the positives of price stability?

Answer 23

• value of money being maintained
• savings not being eroded
• lower interest rates
• investment in productive assets
• international competitiveness
• reduction in uncertainty leading to increased job creation and investment
• income distribution not being distorted

Question 24

what are the costs of price stability?

Answer 24

• inflation redistributes income unexpectedly.
• lenders are worse off
• those with market power and asset owners may be able to ‘hedge against’ the price increases and maintain real incomes
• inflation reduces international competitiveness
• imports will increase
• currency depreciation which may cause imports to increase leading to even more inflation

Question 25

what is the definition of full employment?

Answer 25

full employment occurs when every member of the economy who is both willing and able to work can find a job

Question 26

what is the target rate for employment?

Answer 26

4-5%

Question 27

definition of unemployed

Answer 27

those who are willing and able to work, but are unable to find job. they are actively seeking work

Question 28

at full employment is their cyclical unemployment?

Answer 28

no

Question 29

how does frictional unemployment increase in a boom?

Answer 29

increased confidence and labour shortages cause more householders to voluntarily leave a job in search for a better one

Question 30

how does structural unemployment increase in a boom?

Answer 30

investment changes the structure of the economy

Question 31

formula for unemployment

Answer 31

unemployed / labour force X 100

Question 32

why is the unemployment rate understated?

Answer 32

hidden unemployment and underemployment

Question 33

why does unemployment represent a GDP gap?

Answer 33

inside the PPF so resources aren’t being used efficiently which can cause inflation to rise and growth to slow

Question 34

how does unemployment effect the government?

Answer 34

lose revenue and must increase G1. they may have to shoulder responsibility for increasing growth through discretionary G2

Question 35

how does unemployment represent opportunity cost?

Answer 35

loss of potential investment projects, which are spent on welfare