2.4.2 The multiplier effect

• What is the multiplier effect in economics?

  Larger change in national income
• Key concepts of the multiplier effect include MPC and MPS
• The multiplier can be calculated using the formula: Multiplier = \frac{1}{1 - MPC}</latex>
• If the MPC is 0.8, what is the value of the multiplier?

  5
• The marginal propensity to consume (MPC) is the proportion of additional income that is spent
• Match the concept with its definition:

  Multiplier effect ↔️ Initial change in spending leads to larger change in national income

  Marginal Propensity to Consume (MPC) ↔️ Proportion of additional income spent

  Marginal Propensity to Save (MPS) ↔️ Proportion of additional income saved
• How does the multiplier effect generate a larger increase in national income?

  Series of spending rounds
• Arrange the rounds of spending in the multiplier effect:

  1️⃣ Initial Injection

  2️⃣ First Round

  3️⃣ Second Round

  4️⃣ Subsequent Rounds
• The multiplier effect can be reduced by factors like import spending and taxation
• An initial injection of £100 million with a multiplier of 5 generates a total increase in national income of £500 million.
• What is the effect of taxation on the multiplier effect?

  Reduces overall impact
• The multiplier effect occurs because spending by one firm becomes income
• The marginal propensity to consume (MPC) is the proportion of additional income spent.
• What does the marginal propensity to save (MPS) measure?

  Income saved
• Match the concept with its definition:

  Multiplier effect ↔️ Initial change in spending leads to larger change in national income

  MPC ↔️ Proportion of additional income spent
• The multiplier effect describes how an initial change in spending leads to a larger overall change in national income
• What does the multiplier effect describe in economics?

  Larger change in income
• The Marginal Propensity to Consume (MPC) is the proportion of additional income that is spent
• The Marginal Propensity to Save (MPS) measures the proportion of additional income saved.
• What is the formula to calculate the multiplier using MPS?

  $Multiplier =$$\frac{1}{MPS}$
• If the MPC is 0.8, the multiplier is 5
• Steps in the multiplier effect mechanism

  1️⃣ Initial Injection: Company invests £100 million

  2️⃣ First Round: Workers earn additional income and spend £80 million

  3️⃣ Second Round: Recipients of £80 million spend £64 million

  4️⃣ Subsequent Rounds: Spending decreases proportionally
• The multiplier effect occurs because spending by one entity becomes income for others.
• Why does an initial investment lead to a larger overall change in national income?

  Spending becomes income
• If the MPC is 0.8, an initial £100 million investment increases national income by £500 million.
• What does the multiplier effect describe?

  Increase in national income
• The multiplier effect works through a series of spending rounds
• If the marginal propensity to consume (MPC) is 0.8, workers spend £80 million from an initial injection of £100 million.
• What is the multiplier when the MPC is 0.8?

  5
• The multiplier can be calculated using the formula Multiplier = \frac{1}{1 - MPC}
• What is the formula for the multiplier using the marginal propensity to save (MPS)?

  $Multiplier =$$\frac{1}{MPS}$
• The multiplier effect occurs through a series of spending rounds
• What is the multiplier when the MPC is 0.8?

  5
• What are the two formulas for calculating the multiplier?

  $Multiplier =$$\frac{1}{1 - MPC}$ and $Multiplier =$$\frac{1}{MPS}$
• What does the multiplier effect describe in macroeconomics?

  Larger change in national income
• The multiplier effect using MPC is calculated as \frac{1}{1 - MPC}
• A higher MPC leads to a larger multiplier effect.
• If the MPC is 0.8, what is the multiplier effect?

  5
• The multiplier effect using MPS is calculated as \frac{1}{MPS}
• As MPS increases, the multiplier decreases.