Podcast
Questions and Answers
A rise in autonomous export earnings causes aggregate demand (AD) to ______.
A rise in autonomous export earnings causes aggregate demand (AD) to ______.
rise
The size of the multiplier (k) is directly related to the marginal propensity to ______.
The size of the multiplier (k) is directly related to the marginal propensity to ______.
consume
If the marginal propensity to consume (mpc) is 0.8, the first recipients will spend ______ million dollars.
If the marginal propensity to consume (mpc) is 0.8, the first recipients will spend ______ million dollars.
8
The equation for the multiplier is k = 1 / (1 - ______).
The equation for the multiplier is k = 1 / (1 - ______).
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The extent of the increase in national income (NY) depends on the size of the ______.
The extent of the increase in national income (NY) depends on the size of the ______.
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If the country is below full resource utilization, the rise in income is likely to be ______.
If the country is below full resource utilization, the rise in income is likely to be ______.
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An increase in exports shifts the AD curve from AD to ______.
An increase in exports shifts the AD curve from AD to ______.
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In the given example, the marginal propensity to withdraw (mpw) is ______.
In the given example, the marginal propensity to withdraw (mpw) is ______.
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Flashcards
Autonomous Spending
Autonomous Spending
Changes in spending not influenced by income levels.
Multiplier Effect
Multiplier Effect
The process by which an initial change in spending leads to further income increases.
Marginal Propensity to Consume (mpc)
Marginal Propensity to Consume (mpc)
The fraction of additional income that a household consumes rather than saves.
Multiplier Size Formula
Multiplier Size Formula
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Knock-on Effect
Knock-on Effect
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Real vs. Nominal National Income (NY)
Real vs. Nominal National Income (NY)
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Aggregate Demand (AD) Curve
Aggregate Demand (AD) Curve
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Leakages in Economics
Leakages in Economics
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Study Notes
Multiplier Effect Explanation
- MPS, MPT, and MPM rise when receiving additional income. Households withdraw a large proportion of their new income.
- Singapore has a lower total S and M than the USA due to a smaller population, but higher MPS and MPM due to compulsory savings. This leads to a larger proportion of income being saved.
- A rise in autonomous export earnings causes a rise in AD (Aggregate Demand). This leads to higher consumer spending and a knock-on effect on income.
Multiplier Process using AD/AS Model
- Step 1: Identify the change in autonomous spending.
- Step 2: State the multiplier effect.
- Step 3: Give a numerical example (e.g., a $10m rise in exports). This example shows how the initial increase in spending leads to a chain reaction of increased income and spending.
- Step 4: Draw and explain the AE-Y (Expenditure-Output) diagram. This graph illustrates the shift in AD and the final equilibrium change in output (Y), due to the multiplier effect.
Multiplier Effect Calculations
- Multiplier (k): k = 1 / (1 - MPC) = 1 / MPW
- MPC (Marginal Propensity to Consume): Fraction of additional income spent on consumption.
- MPW (Marginal Propensity to Withdraw): Fraction of additional income saved, or withdrawn in other ways like imports/taxes.
- Example: If MPC = 0.6 & MPW = 0.4, k = 2.5 This indicates that a $10m increase in exports results in a $25m increase in national income.
Real vs. Nominal Impact on National Income (NY)
- The impact on national income (NY) depends on whether the economy is currently below full resource utilization.
- Nominal NY would rise by an amount equal to the initial injection plus the multiplier. A large increase in NY often signifies inflationary pressures.
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Description
This quiz explores the concept of the multiplier effect, focusing on how additional income influences savings and spending within an economy. It covers the implications of changes in autonomous spending on aggregate demand and provides a step-by-step guide using the AD/AS model. Participants will also visualize these concepts through economic diagrams.
