2.4.4 - the multiplier

define the multiplier ratio

ratio of change in real income to the injection that created the change

eg. if a £5m injection leads to a £15m increase in real income, the multiplier is 3

give an example of the multiplier effect using a hospital to start

• gov spend on a new hospital

• ppl employed

• more income

• AD increase

• output increase

• even more ppl hired

• even more AD

• etc..

AND

• more employment

• more tax revenue

• gov can spend again - restart proces

what is the size of the multiplier dependent on

the size of withdrawals/leakages that occur during the process

HIGHER LEAKAGES = smaller multiplier

(+ vice versa)

multiplier effect on a graph

secondary shift of AD to the right

eg. if the multiplier were 2, it would be double the initial movement

when withdrawals increase, what can happen

the multiplier can also work in reverse (downward multiplier effect)

give another rundown of how it would work for the downwards multiplier effect

• crisis hits (eg. 2008)

• ppl save more

• AD decreases

• lower output

• workers fired

• AD decreases even more

• even more workers fired

• etc…

4 marginal propensities u should know

MPC (consume)

MPS (save)

MPT (tax)

MPM (import)

the last 3 make up MPW (withdraw)

definition of the different marginal propensities

the proportion of additional income that is…[relevant thing here]

how do u calculate marginal propensities

change in whatever the last letter is OVER change in income

example pictured

relationship between MPC and MPW

MPW = 1 - MPC

how do u calculate the value of the multiplier

multiplier = 1 OVER MPW (pictured)

the greater the MPC…

…the greater the value of the multiplier

what will change the multiplier

a change in any factor that impacts disposable income or MPW:

• taxes (withdrawal)

• interest rates (amt available to spend)

• exchange rates (import prices)

• confidence in economy (savings)

who might find the multiplier value useful

the government

if they know it they can use it to judge the likely economic growth caused by spending

caveat to economic growth caused by multiplier

there is a time lag bc it takes time for the successive rounds of income to work through the economy