Multiplier + Accelerator

Question 1

What is the multiplier effect?

Answer 1

A change in one of the components of AD can lead to a multiplied final change in the equilibrium level of GDP

Question 2

Formula for Multiplier (closed economy)

Answer 2

1 / (marginal propensity to save)

1 / ( 1-marginal propensity to consume)

Question 3

Formula for Multiplier (open economy)

Answer 3

1 / (sum of save + tax + import)

Question 4

How Multiplier Works?

Answer 4

• Injection causes extra demand + output in economy
• extra flow of factor incomes e.g. higher wages and profits
• if the extra incomes stay in the economy impact on GDP could be large

Question 5

Calculation of MPC + MPS

Answer 5

MPC = change in total consumption /change in gross income

Question 6

Multiplier depends on

Answer 6

• Economy has spare capacity
• Marginal propensity to import and tax is low
• High propensity to consume any extra income
• Low multiplier when high inflation

Question 7

Accelerator Effect

Answer 7

• Relationship between planned investment + rate of change of national income
• Investment stimulates growth which stimulates investment etc.