The Multiplier And Accelerator Flashcards
(19 cards)
What is the multiplier?
The ratio of a change in equilibrium real income to the autonomous change that brought is about (the size is the amount which national income increase as a result of an injection in flow of income)
How do you calculate the multiplier
Change in national income/initial change in component of AD
1/1-mpc
1/mpw
How do you calculate marginal propensity to consume?
MPC=Change in consumption/ change in income
MPC=1-MPW
How do you calculate marginal propensity to import
MPM=Change in levels of imports/ change in income
How do you calculate marginal propensity to save
MPS=Change in the level of saving/change in income
MPS=1-MPC
How do you calculate marginal propensity to tax
MPT=Change in level of tax/ change in income
What is the acceleration effect?
When an increase in national income results in a proportionally larger rise in investment
How do you calculate marginal propensity to withdraw
MPW=MPS+MPM+MPT
What is the accelerator theory
The level of investment depends on the rate of change in national income
What is net investment?
Gross investment minus depreciation of capital stock
What is gross investment?
Total investment into capital stock
What is an output gap?
The difference between the actual level of real GDP and the full employment level
What is a negative output gap?
When the actual GDP is below potential so not producing to productive potential
What are the cause of a negative output gap?
Loss of household confidence
Supply side shock/ increase in cost of production
Fall in government spending
Increased taxes
Fall in demand for exports
What are the consequences of a negative output gap?
Unemployment
Falling tax revenues
Lower standard of living
What is a positive output gap?
When actual GDP id above potential, it only happens in the short run as operating beyond capacity so rise in production cost
What cause a positive output gap?
Increase in household income
Firm investing more
Increase in confidence
Decrease in tax
Increase in government spending
What are the consequences of a positive output gap
Increase standard of living
Increased employment
Increased tax revenue
What do the consequences of output gaps depend on:?
Whether the cause is long term or temporary
