Multiplier effect

Question 1

Multiplier effect

Answer 1

When an initial change in an injection or leakage leads to a larger and more widespread final impact on an economy’s total output or income. When an individual increases its spending, the recipients of that spending have more income, which they spend on goods and services. This creates additional demand, which prompts businesses to increase production and hire more workers, resulting in higher factor incomes.

Question 2

Positive multiplier effect

Answer 2

An initial increase in an injection/decrease in leakage leads to a greater final increase in the level of real GDP

Question 3

Negative multiplier effect

Answer 3

When an initial decrease in an injection, or an increase in a leakage, leads to a greater final decrease in the level of real GDP.

Question 4

Multiplier Formula=

Answer 4

1/ Marginal propensity to save = 1/MPS + MPM + MRT = 1/Marginal rate of withdrawal

Question 5

In a closed economy with no government sector:

Answer 5

Multiplier shows impact of change in investment on national income

Question 6

Three withdrawals from circular flow of income in open economy within government sector:

Answer 6

1. Savings( marginal propensity to save)
2. Imports(marginal propensity to import)
3. taxation(marginal tax rate on income)

Question 7

Marginal propensity to savings

Answer 7

Change in savings followed by a small change in income

Question 8

What factors affect the multiplier value?

Answer 8

A higher marginal propensity to consume leads to a large multiplier effect, with a greater proportion of any initial increase in income spent, leading to multiple rounds of increased spending and output.
Leakages from the circular flow, such as savings, taxes and imports, reduce the size of the multiplier.
Degree of spare capacity: In an economy’s operating close to full capacity, the multiplier effect might be limited.
Time frame: In the short run, factors like capacity constraints and rigidities in adjusting production can limit the multiplier’s size. In the long run, adjustments in production capacity, investment and resource allocation lead to a larger multiplier effect.
Low multiplier value when higher inflation causes rising interest rates dampening the other components of AD