The Multiplier, The Accelerator, Marginal Propensities & Output gaps- MM

Question 1

When does the multiplier effect occur?

Answer 1

When an initial change in aggregate demand has a greater final impact on the equilibrium national income

Question 2

What does fiscal relate to?

Answer 2

Government spending (G) & taxation (T)

Question 3

What does the accelerator theory state?

Answer 3

An increase in real GDP will often lead to a proportionally higher increase in private sector investment (I)

Question 4

How can the accelerator theory be explained?

Answer 4

Greater levels of business confidence

Question 5

What is the most sensitive/volatile component of AD?

Answer 5

Investment (I)

Question 6

What do injections create?

Answer 6

New income, expenditure & product

Question 7

What do leakages do to the size of a multiplier?

Answer 7

Reduce it

Question 8

What two ways can be used to calculate the multiplier?

Answer 8

1/1-MPC or 1/MPW

Question 9

What does P stand for?

Answer 9

Propensity (likelihood, tendency)

Question 10

How do you calculate average propensity to consume (APC)?

Answer 10

APC=C/Y

Question 11

What does average propensity to consume (APC) show?

Answer 11

The % of income that consumers tend to spend

Question 12

What does average propensity to save (APS) show?

Answer 12

The % of income we save

Question 13

How do you calculate average propensity to save (APS)?

Answer 13

S/Y

Question 14

What does average propensity to tax (APT) show?

Answer 14

% of incomes paid in taxation

Question 15

How do you calculate average propensity to tax (APT)?

Answer 15

T/Y

Question 16

What does average propensity to import (APM) show?

Answer 16

% of income spent on imports

Question 17

How do you calculate average propensity to import (APM)?

Answer 17

M/Y

Question 18

What does APC+APS+APT+APM equal?

Answer 18

1

Question 19

How do you calculate marginal propensity to consume (MPC)?

Answer 19

ΔC/ΔY

Question 20

How do you calculate marginal propensity to save (MPS)?

Answer 20

ΔS/ΔY

Question 21

How do you calculate marginal propensity to tax (MPT)?

Answer 21

ΔT/ΔY

Question 22

How do you calculate marginal propensity to import (MPM)?

Answer 22

ΔM/ΔY

Question 23

What are the 4 options households have with their change in income?

Answer 23

Consume, save, pay more tax or import

Question 24

What does MPC+MPS+MPT+MPM equal?

Answer 24

1

Question 25

Why is C different to S,T & M?

Answer 25

C increases Real GDP, leakages reduce it

Question 26

What are S,T & M now referred to as?

Answer 26

Withdrawals from the circular flow of income

Question 27

How do you calculate the marginal propensity to withdraw (MPW)?

Answer 27

MPS+MPT+MPM

Question 28

What does MPC+MPW equal?

Answer 28

1

Question 29

What is the multiplier effect about?

Answer 29

Consumer spending- extra spending when AD ↑

Question 30

What is the accelerator effect about?

Answer 30

Firm spending- investment (I)

Question 31

What does a higher MPW do to MPC and the multiplier?

Answer 31

↓ MPC, ↓ Multiplier

Question 32

What does the size of a multiplier depend on?

Answer 32

Level of leakages from the system

Question 33

What 3 factors may affect leakages and how?

Answer 33

1) Interest rates- ↑ IR = ↑ Savings 2) Tax levels- ↑ Tax = ↑ Taxation 3) Exchange rate- SPICED- ↑ rate= ↑ imports

Question 34

How is the multiplier effect demonstrated on a diagram?

Answer 34

AD curve shifts right again after initial shift (AD1-AD2-AD3)

Question 35

How can another shift in AD be determined by the accelerator effect?

Answer 35

Increase in real GDP initially can boost business confidence- ↑ investment (I)

Question 36

How can a negative output gap be demonstrated on a diagram?

Answer 36

LRAS curve higher than equilibrium (Pl1, Y1)

Question 37

Why does a negative output gap occur?

Answer 37

When resources are not being fully employed in the economy

Question 38

What does an increase in AD do to a negative output gap?

Answer 38

Decreases the size of it- fewer unemployed resources

Question 39

How can a positive output gap be demonstrated on a diagram?

Answer 39

LRAS curve lower then equilibrium (PL1, Y1)

Question 40

Why does a positive output gap occur?

Answer 40

Resources are over-employed (at a unsustainable level)

Question 41

What will a shift right in AD cause when there is a positive output gap?

Answer 41

Inflation

Question 42

How can full employment (Yfe) be shown on a PPF diagram?

Answer 42

A point on the curve

Question 43

How can a negative output gap be shown on a PPF diagram?

Answer 43

A point inside the curve

Question 44

How can a positive output gap be shown on a PPF diagram?

Answer 44

A point outside the curve