The multiplier

• What is the multiplier?

  The amount by which a change in an injection or withdrawl causes total income to change
• What causes the multiplier effect?

  Income being respent in the economy
• What is the multiplier formula?

  Multiplier = Change in real GDP/Change in injections
• What effect does the multiplier have on the economy?

  It causes an injection to have an increased effect on GDP
• What is the marginal propensity to consume?

  The proportion of an increase in income that is spent
• What is the formula for the MPC?

  MPC = Change in consumption/Change in income
• How does the value of the MPC impact value of the multiplier?

  The higher the value of the MPC, the higher the value of the multiplier
• What is the multiplier formula using the MPC?

  Multiplier = 1/(1-MPC)
• What is the marginal propenstiy to save?

  The proportion of an increase in income that is saved
• What is the formula for the MPS?

  MPS = Change in saving/Change in income
• How does the value of the MPS impact the value of the multiplier?

  The higher the value of the MPS, the lower the value of the multiplier
• What is the multiplier formula using the MPS?

  Multiplier = 1/(1-MPS)
• What is the marginal propensity to tax?

  The proportion of an increase in income that is taxed
• What is the formula for the MPT?

  MPT = Change in tax/Change in income
• How does the value of the MPT impact the value of the multiplier?

  The higher the value of the MPT, the lower the value of the multiplier
• What is the marginal propensity to import?

  The proportion of an increase in income that is spent on imports
• What is the formula for the MPM?

  MPM = Change in imports/Change in income
• How does the value of the MPM impact the value of the multiplier?

  The higher the value of the MPM, the lower the value of the multiplier
• What is the effect of a change in any one the injections or withdrawls on the economy?


  The effect on the economy will be much greater than the original change due to the multiplier magnifying these changes
• How does the multiplier affect AD?

  The higher the value of the multiplier, the larger the overall shift in AD, and vice versa
• What is the first stage of the multiplier process?

  There is an injection into the circular flow of income
• What is the second stage of the multiplier process?

  The injection forms the income of businesses, which in turn generates new incomes to workers and shareholders
• What is the third stage of the multiplier process?

  Some of the income generated from these new businesses is spent, but some leaks out of the circular flow in the form of withdrawls
• What is the fourth stage of the multiplier process?

  The proportion of money spent by businesses forms the income of other groups of people and again, some is spent and some leaks out of the circular flow
• What if the fifth stage of the multiplier process?

  The process repeats until all the money put into the economy from injections has been spent or has leaked out through withdrawls