Multipler Effect (1 Viewer)

[darkdog307]

How does the multiplier effect increase nation income? or affect other aspects in general.

 

[ismeta]

(I'm going off the top of my head here, someone correct me if I'm wrong? )

So starting with the MPC, the marginal propensity to consume. Let's say that we have a MPC of 0.4, we know that if we increase income by $1000 then $400 will be consumed and the rest saved. Thus if there is an injection to the economy of P dollars, then P x 0.4 of it will be consumed. Because this money is consumed, it means that (theoretically) it's like a second round of injections: the money is going into the economy *again* as they spend it. Following from this, the individuals and businesses that receive this second round of 'injections' will also spend 40% of that amount, and so on, thus increasing national income.

It can be shown using 2U mathematics that the multiplier is k = 1/(1 - MPC).

 

[darkdog307]

Oh, yeah that rings bells haha , thanks!

 

[Skeptyks]

they sometimes don't tell you the MPC right?

 

[Ich Mag Sechs]

they sometimes don't tell you the MPC right?

Yea you're right, sometimes they'll tell you the increase in investment expenditure and the resulting increase in national income. In order to figure out k you divide the increase of income over the increase in investment, and figure out both the MPC and MPS accordingly

 

[darkdog307]

I was more talking about a short answer.

 

[Skeptyks]

for a short answer, wouldn't part (a) be finding the multiplier / outcome from a certain investment then for (b), (c), they would ask you questions related to the answer you find?