The Multiplier

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Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

The Multiplier Effect suggests that an increase in Aggregate Demand caused by an increase in Injections into the economy will result in greater National Income
When an initial injection into the economy causes a larger increase in national income
As the injections increase, the rise in national income will continue to get bigger
If there are more withdrawals circulating in the economy, the multiplier effect will be smaller
Marginal Propensity to Consume = change in consumption / change in income
The more money you save and the less you spend, the lower the multiplier ratio will be
The multiplier ratio decreases as the marginal propensity to save increases
Marginal Propensity to Save (mps) – proportion of income a consumer saves rather than spends
Marginal Propensity to Withdraw (mpw) – the extra income withdrawn from the circular flow and consists of tax, savings, imports
Marginal Propensity to Tax (mpt) = change in tax / change in income
Marginal Propensity to Import (mpm) = the amount imports increase or decrease as a result of a one unit change in income

OR

If there is a cut in government spending, some public sector worker may experience a job loss
Workers who have lost their job would have less disposable income to spend on purchasing goods / services
Consequently, there will be less injections into the economy, causing an initial fall in national income
This causes a negative multiplier effect to occur

The value of the multiplier depends on the percentage of extra money that is spent on the domestic economy.

If people spend a high % of any extra income (a high mpc), then there will be a big multiplier effect.
However, if any extra money is withdrawn from the circular flow the multiplier effect will be very small.

Quick Fire Quiz – Knowledge Check

1. Define ‘Marginal Propensity to Consume’ (2 marks)

2. Define ‘Marginal Propensity to Withdraw’ (2 marks)

3. Define ‘Marginal Propensity to Save’ (2 marks)

4. Define ‘Marginal Propensity to Tax’ (2 marks)

5. Define ‘Marginal Propensity to Import’ (2 marks)

6. Explain what the Multiplier Effect shows (4 marks)

7. Identify the formulas to calculate the Multiplier Ratio (4 marks)

9. Explain what a Negative Multiplier Effect is (4 marks)

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