Multiplier Effect & Accelerator

Question 1

Define Multiplier Effect

Answer 1

The process in which a increase in components of AD will lead to a proportionally larger increase in National Income (GDP)

Question 2

What is the equation of the multiplier effect?

Answer 2

1 / (1-MPC) OR 1/MPW

Question 3

Why is the multiplier effect determined on MPC?

Answer 3

As the higher the marginal propensity to consume, the more increase in consumer spending, a component of AD, shifting AD to the right and increasing RGDP

Question 4

What is MPC determined by?

Answer 4

• The level of savings, taxation, imports (the higher withdrawals, the lower the MPC)

Question 5

Give a real-world example of the multiplier effect in the UK

Answer 5

The hosting of the 2012 Olympics/ Regeneration of Stratford (Canary Wharf) (110k jobs in east London)

Question 6

Define Accelerator Process

Answer 6

How a change in investment leads to a change in rate of GDP Growth

Question 7

If investment increases, the rate of GDP will also..

Answer 7

Increase as firms are more willing and able to supply a good/service (profit motive)