Economics- Edexcel 2.4.4
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| multiplier effect | an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital
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| what brings about the multiplier effect | a change in one of the components of AD leads to a multiplied final change in the equilibrium level of GDP(injections of new demand stimulates further rounds of spending as ‘one person’s spending is another’s income’)
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| formula for multiplier | 1/marginal propensity to save OR 1/(1-marginal propensity to consume)
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| formula for multiplier with a closed economy with a government sector | 1 / (sum of marginal propensity to save + marginal rate of tax)
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| formula for multiplier with an open economy with a government sector | 1 / (sum of propensities to save + tax + import)
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| Keynesian multiplier | a theory that states the economy will flourish the more the government spends
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| positive multiplier | when an initial increase in an injection(or decrease in leakage) leads to a greater final increase in real GDP
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| negative multiplier | when an initial decrease in an injection(or increase in leakage) leads to a greater final decrease in real GDP
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| marginal propensity to consume | proportion of additional income that is spent in th domestic economy
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| marginal propensity to import | the proportion of additional income spent on imports
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| marginal propensity to save | proportion of additional income that is saved
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| marginal propensity to tax | the proportion of additional income that is paid to the government as tax
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| marginal propensity to withdraw | proportion of additional income leaving the circular flow (sum of MPM, MPS and MPT)
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| MPC | marginal propensity to consume
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| MPM | marginal propensity to import
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| MPS | marginal propensity to save
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| MPT | marginal propensity to tax
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| MPW | marginal propensity to withdraw
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| MPC formula | change in total consumption / change in gross income
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| MPS formula | change in total savings / change in gross income
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| when is there a high multiplier value? | economy has lots of spare capacity(negative output gap) to meet higher AD/MPM, MPS and MPT is low
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| when is there a low multiplier value? | economy is close to capacity druing boom phase/ MPM is high(extra demand leaks)/higher inflation causes rising interest rates that dampen other components of AD
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