2.4.4 The Multiplier

• What is the multiplier ratio?

  Rise in national income to initial rise in AD
• What does the multiplier effect lead to?

  Economic growth and more jobs
• How does one person's spending affect another?

  It becomes another person's income
• What is the marginal propensity to consume (MPC)?

  Proportion of additional income spent
• How does a higher MPC affect the multiplier?

  It increases the size of the multiplier
• How can the government influence the MPC?

  By changing the rate of direct tax
• What is the marginal propensity to save (MPS)?

  Proportion of income saved
• What is the relationship between MPS and MPC?

  MPS + MPC = 1
• What is the marginal propensity to tax (MPT)?

  Proportion of each pound taxed by government
• How does a higher rate of tax affect the multiplier?

  It reduces the size of the multiplier
• What is the marginal propensity to import (MPM)?

  Proportion of income spent on imports
• How does spending on imports affect the multiplier?

  It reduces the size of the multiplier
• What is one formula to calculate the multiplier?

  $1/(1-MPC)$
• If consumers spend 0.6 of every £1, what is the multiplier?

  $2.5$
• What are the three areas of withdrawals in an open economy?

  Taxes, imports, and savings
• How is the marginal propensity to withdraw (MPW) calculated?

  MPW = MPS + MPT + MPM
• What is another formula for calculating the multiplier?

  $1/MPW$
• What happens if an economy has a lot of spare capacity?

  Multiplier size will be larger
• What occurs if AS is inelastic?

  Multiplier effect is likely to be smaller
• What is a 'reverse' multiplier?

  Withdrawal leads to larger income decrease
• What can a reverse multiplier lead to?

  Decrease in economic growth