2.4 Aggregate demand and the level of economic activity

Multiplier is

The relationship between an initial change in aggregate demand and the greater resulting change in national income

Causes of the initial change in AD which leads to the multiplier effect

Government spending, investment and exports (injections in to the circular flow of income)

Graph that shows the multiplier effect

AD and AS with two shifts in AD shown the second greater than the first

Multiplier formula

1/MPW or 1/1-MPC

MPC

Marginal propensity to consume

Number between 0 and 1

Reflects the proportion of an increase in income that will be spent instead of saved, taxed and spent on imports

Why the size of the MCP determines the magnitude of the multiplier effect

The MPC reflects the proportion of an increase in income that a consumer spends on the consumption of goods and services

A high MCP means more consumption and less withdrawals (tax, savings and imports)

What is included in the MPW

Taxation, Savings and imports

MPC

change in consumption / change in income

why does the multiplier effect exist

one presons spending is anothers income