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Economics 2.4.4 - Coggle Diagram
Economics 2.4.4
multiplier process
one person's spending becomes another persons income
an increase in initial spending injects money into the economy
an increase in any injection will lead to an even greater increase in income
this spending becomes income for households and firms who then spend a portion of this income
generates additional income for others
each round of spending is smaller due to withdrawals
can be negative
multiplier ratio
quantifies the total change in national income resulting from an initial change in spending
the higher the number the more future spending that is generated so the larger effect on AD
causes aggregate demand to increase by more than the initial increase in injection
injections can be targeted at those with the highest MPC so the multiplier effect is largest
it is impossible for the government to know the exact effect of their spending
time lags
marginal propensity
MPC
the proportion of additional income that a consumer spends
MPS
the proportion of additional income that a consumer saves
MPW
the proportion of additional income that a consumer does not spend
MPT
the proportion of additional income that a consumer spends on taxes
MPM
the proportion of additional income that a consumer spends on imported goods
calculations
1/ MPW = multiplier
1/ 1-MPC = multiplier
MPS + MPT + MPM = MPW
Factors affecting the multiplier
interest rates
higher means less consumption and more savings so multiplier falls
household wealth
marginal propensity to consume rises as households believe they have more wealth
change to tax rates
a rise in taxes will decrease MPC and multiplier falls
effects of multiplier on economy
economic expansion
more spending than initial injection so economy grows
jobs are created
enhanced living standards
economic contraction
deeper recessions
increasing unemployment
decreased income leads to reduced economic activity leading to lower incomes and consumption
evaluation points
must be spare capacity in the economy
If AS is perfectly inelastic the multiplier will only increase price