Multiplier

• What is the multiplier effect?

  It is the increase in GDP from spending.
• What prompts the multiplier effect?

  An injection into the economy prompts it.
• What happens every time there is an injection into the circular flow?

  There is likely to be a multiplier effect.
• What does the multiplier effect refer to?

  The increase in final GDP from spending.
• What does the marginal propensity to consume (MPC) indicate?

  It indicates household spending decisions.
• How does spending affect income in the multiplier effect?

  Spending creates more income, and so on.
• What is the formula for calculating the multiplier?

  1 divided by the marginal propensity to withdraw.
• What is the marginal propensity to withdraw (MPW)?

  It is the total of MPS, MPT, and MPM.
• If MPS is 0.25, MPM is 0.1, and MPT is 0.15, what is the MPW?

  0.5
• What is the value of the multiplier if MPW is 0.5?

  2
• How much will overall AD/GDP increase with a £100 million injection if the multiplier is 2?

  £200 million
• What is the alternative formula for calculating the multiplier?

  1 divided by 1 minus the MPC.
• If the MPC is 0.4, what is the value of the multiplier?

  1.666
• What happens to the multiplier value if the MPC increases?

  The multiplier value will increase.
• What is 'lag time' in the context of the multiplier effect?

  Time until the last round of spending is complete.
• What factors affect the overall impact of the multiplier?

  MPC, MPT, MPM, and MPS.
• How does a low MPC affect spending rounds?

  Each round of spending will be lower.
• What is the downward effect of the multiplier?

  Redundancies lead to less spending locally.
• When are the full benefits of the multiplier effect not felt?

  If the economy is close to full employment.
• How does a high propensity to import affect the multiplier effect?

  It reduces the multiplier's impact.
• What is the accelerator effect?

  • Increase in national income leads to larger investment rise.
  • Firms expand supply initially by using current resources.
  • Continued consumption increases may lead to new capital investments.
  • Shifts LRAS curve to the right, indicating potential economic growth.
• Is the accelerator effect required by Edexcel in the AS specification?

  No, it is not required.
• What happens to the LRAS curve when firms invest in capital goods?

  It shifts to the right.
• Why is investment important in AD?

  It demonstrates the significance of component I.
• What is an injection into the economy?

  An increase in government spending, investment, or exports.
• How do injections relate to the circular flow?

  Injections prompt further rounds of spending.
• What is the significance of the marginal propensity to save (MPS)?

  It indicates how much income is saved.
• What is the significance of the marginal propensity to tax (MPT)?

  It indicates how much income is taxed.
• What is the significance of the marginal propensity to import (MPM)?

  It indicates how much income is spent on imports.
• What does Keynes' quote about spending and income imply?

  One person's spending is another's income.
• How does full employment affect the multiplier effect?

  It limits the full benefits of the multiplier.
• How does protectionism affect the marginal propensity to import (MPM)?

  It should reduce the MPM of consumers.