business cycle short run growth the multiplier accelerator effects n.
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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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  • 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
  • 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

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

trend growth is falling why
Trend growth is falling – why?

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withdraw : “the sum of marginal propensities to save, tax, import – the proportion of additional income that is withdrawn from the circular flow”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