The Multiplier (Theme 4)

4.4.1

what is the multiplier effect?

process where any initial change in ad leads to a greater final change in real gdp. this is any injection

what is the multiplier value?

1/Marginal Propensity to Withdraw

MPW refers to percentage of money leaking out - tax, imports and savings - over a year/cycle

when is the multiplier most effective?

when consumption is high and leakages are low, so mpw is smaller

mpw increases as a country gets richer

what are the problems with the multiplier?

there are regional differences

it depends on what it being cut or what expenditure is used

when full capacity is reached, there may be a rebound as inflation settles in

there are time lag effects