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The Multiplier

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by

Hugo Flower

on 21 November 2016

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Transcript of The Multiplier

The Multiplier
An initial change in aggregate demand can have a much greater final impact on equilibrium national income
It comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending.
– in other words “one person’s spending is another’s income”
It is the number of times a rise in national income exceeds the rise in injections of demand that caused it
Story time
Activity:
You are going to play a similar game to the circular flow game played before half term but with a twist.
Half of you will be households possessing factors of production and half of you will be firms with money, looking to buy factors of production.
The firms will then make products from a set of Land, Labour & Capital to make 1 Good or Service
They will then sell this Good or Service back to the households who will pay for it using the money earned earlier.
It is up to you to bargain a price.
The twist is that there will be an injection at some point...
What does the size of the multiplier depend on?
1. The Marginal Propensity to Consume
2. The Propensity to Import
3. The amount of spare capacity (the elasticity of the AS curve)
(AKA evaluation)
4. The time lag - how long it takes to have an effect
Other things to consider:
There is such a thing as the
Reverse
Multiplier
The 'Accelerator'
is a similar effect but with
INVESTMENT
instead of Consumption.
This is when firms invest in more capital goods (factories, machinery etc) after an increase in AD as confidence is high.
The multiplier is estimated to be around 1.4 in the UK
Full transcript