2.4.3 The multiplier effect

Define the multiple effect

the process by which any change in the competes of AD will lead to an even greater change in national output

Write down the multiplier formula

1/(1-MPC) or 1/MPW

Define the term marginal propensity to consume MPC

Out of each extra pound being earned how much will be spent. Ranges from 0-1. 1 meaning all of the extra pound being earns is spent.

How do changes in the MPC effect the multiplier effect

The higher the MPC the greater the value of the multiplier and the bigger the effect on the initial investment will be

Define the term marginal propensity to save MPS

How much of an extra pound earned would be saved

Define the term marginal propensity to tax MPT

How much of an extra pound earned will be taxed

Define the term marginal propensity import MPM

How much of an extra pound earned will be spent on imports

Define the term Marginal propensity to withdraw MPW

The opposite of the MPC how much of the extra pound is being spent on saving, taxes and imports. MPW= MPS+MPT+MPM

How do changes in the MPW affect the multiplier

The higher the MPW the lower the value of the multiplier will be and the smaller its effect on the injection will be

How does the multiplier effect impact the GDP of an economy

The initial injection will increase AD and GDP. The multiplier then increase the initial impact of the injection.

Draw the impact of the multiplier effect on an AD/AS diagram

How could a negative multiplier lead to a downward spiral in an economy

The initial withdrawal would have its impact compounded by the negative multiplier.