What is the definition of the multiplier effect?
The multiplier effect refers to the process by which an injection (i.e. government spending, investment, exports) into the economy results in a greater change in national output and income.
What is a positive multiplier?
When an initial increase in an injection (or a decrease in a leakage) leads to a greater final increase in real GDP
What is a negative multiplier?
When an initial decrease in an injection (or an increase in a leakage) leads to a greater final decrease in real GDP
What are 2 cases in which there is a high multiplier value?
When the economy has plenty of spare capacity
Marginal propensity to import and tax is low
High propensity to consume and extra income (people have a low marginal propensity to save)
What are 2 cases in which there is a high multiplier value?
Economy is close to capacity limits during a boom phase of an economic cycle
Propensity to import goods and services is high
Higher inflation causes rising interest rates which then dampens the other components of AD
What is the accelerator effect?
The accelerator effect is when an Increase in national income results in a proportionately larger rise in investment.
What is the negative accelerator effect?
When the rate of growth of demand in an industry slows then net investment spending by businesses often falls
Give an example of the negative accelerator effect?
Declining investment in steel plants in a recession or a drop in investment demand when government subsidies for renewable energy are cut
What is an example of the accelerator effect?
the surge in capital investment in wind turbines due to the super-high level of oil and gas prices and a rising market demand for renewable energy.
