The multiplier effect Flashcards
(4 cards)
1
Q
When does the multiplier effect occur?
A
When an initial injection into the circular flow causes a bigger final increase in real national income
‘One agent’s spending is another agent’s income’
2
Q
How do you find the multiplier coefficient?
A
Final change in GDP / Initial change in AD
3
Q
When does the negative multiplier effect occur?
A
An initial withdrawal or leakage of spending from the circular flow leads to knock-on effects and a bigger final drop in real GDP
4
Q
How to calculate the multiplier?
A
1 / (1-MPC) OR 1/MPW
MPW = MPS+MPT+MPM
