Business cycle short run growth the multiplier accelerator effects
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Business Cycle, Short Run Growth, The Multiplier & Accelerator Effects. Draw & Label this diagram with what you recall from AS Economics. Objectives. Understand the concept of the ‘output gap’

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Business cycle short run growth the multiplier accelerator effects

Business Cycle, Short Run Growth,The Multiplier & Accelerator Effects



Objectives
Objectives Economics

  • Understand the concept of the ‘output gap’

  • Be able to explain how the relationship between the ‘output gap’ and short term and long term economic growth

  • Be able to explain the economic theory behind multiplier and accelerator effects

  • To be confident in calculating multiplier effect


The output gap
The Output Gap Economics

  • The difference between actual GDP and it’s trend value

  • In other words the actual level of output minus the potential level

  • Negative = trough

  • Positive = peak




A permanent loss of output
A permanent loss of output Economics

UK GDP still well below the peak before the last recession..............


Trend growth is falling why
Trend growth is falling – why? Economics

Recession may have inflicted damage on trend growth




  • Multiplier Effect : “the ratio of a change in equilibrium real income to the autonomous change that brought it about ; it is calculated as 1/mpw (marginal propensity to withdraw)”

  • In other words when workers see their income increase, it is the proportion of the increase that is spent and therefore benefits the economy

  • Marginal Propensity withdraw : “the sum of marginal propensities to save, tax, import – the proportion of additional income that is withdrawn from the circular flow”


Worked example of multiplier
Worked example of multiplier real income to the autonomous change that brought it about ; it is calculated as 1/

  • Households save 5%

  • Households spend 10% of imports

  • Households are taxed 25%

  • MPW = s+m+t = ?

  • Multiplier effect = 1/mpw = ?

    The larger the multiplier, the bigger the AD shift


Work out this example
Work out this example real income to the autonomous change that brought it about ; it is calculated as 1/

  • Households save 10%

  • Households import 15%

  • Households tax 30%

  • What is the marginal propensity to withdraw?

  • What is the multiplier effect?


The accelerator effect
The accelerator effect real income to the autonomous change that brought it about ; it is calculated as 1/

  • “a theory by which the level of investment depends upon the change in real output”

  • As economic growth increases in recovery, firms invest more. As the cyclical growth slows, firms reduce investment

  • Works in tandem with multiplier.

  • Firms invest, increases income of workers who spend some in the economy, leads to growth, leads to further investment


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