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Business Cycle, Short Run Growth, The Multiplier & Accelerator EffectsPowerPoint Presentation

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

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

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 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

Growth and the Output Gap Economics

A permanent loss of output Economics

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

Trend growth is falling – why? Economics

Recession may have inflicted damage on trend growth

AD/AS & Short Run Growth Economics

AD & AS through a business cycle Economics

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withdraw : “the sum of marginal propensities to save, tax, import – the proportion of additional income that is withdrawn from the circular flow”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