multiplier/accelerator effect

Question 1

define multiplier

Answer 1

when an initial injection of spending into the economy leads to a larger final increase in national income (gdp)

Question 2

explain the fundamentals of multiplier effect

Answer 2

any increase in spending by aggregate demand will create income for someone else and this will facilitate further spending
this pushes aggregate demand curve outwards

Question 3

what’s the formula to calculate the size of the multiplier?

Answer 3

1 divided by 1-mpc = 1 divided by mps

Question 4

define the marginal propensity to consume

Answer 4

the proportion of any extra income that is spent on consumption
eg: if mpc= 0.8, out of every £1 earned, 80p is spent

Question 5

define marginal propensity to save

Answer 5

the proportion of any extra income that is saved
eg: is mps= 0.2, then for every extra £1 that is earned, 20p is saved

Question 6

what happens to the multiplier if people have an increased tendency to save?

Answer 6

mpc falls
smaller multiplier

Question 7

what happens if mpc increases?

Answer 7

multiplier increases

Question 8

define accelerator

Answer 8

where changes in investment can be directly linked to changes in the rate of gdp growth

Question 9

explain the basic accelerator process

Answer 9

when there’s an increase in demand for a good/service, companies invest more money to meet the demand. this leads to higher production- more jobs and more income stimulates further demand

economic growth stimulates investment through demand

Question 10

what happens when there’s negative growth?

Answer 10

falling gdp
firms will stop investing/make cuts, this reduces aggregate demand

Question 11

what perspective is multiplier and accelerator?

Answer 11

producer perspective

Question 12

what happens when there’s rising gdp and positive growth?

Answer 12

firms will invest in capital by increasing office spaces, invest in new tech and expand the factory

Question 13

what is a benefit that containerisation can bring about for firms?

Answer 13

reduced cost of transport

Question 14

what factors influences business investment?

Answer 14

1) expected demand for g/s
2) expected profit/taxes
3) interest rates

Question 15

why do firms need to invest into machines every year?

Answer 15

because every unit thats consumed by firms will lead to a decrease in a machines productive capacity (wear out)