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To explain the Multiplier and Accelerator To analyse the Multiplier and Accelerator

The Multiplier and Accelerator. To explain the Multiplier and Accelerator To analyse the Multiplier and Accelerator To evaluate the Multiplier and Accelerator. Multiplier Effect.

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To explain the Multiplier and Accelerator To analyse the Multiplier and Accelerator

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  1. The Multiplier and Accelerator To explain the Multiplier and Accelerator To analyse the Multiplier and Accelerator To evaluate the Multiplier and Accelerator

  2. Multiplier Effect …is the process by which any change in a component in aggregate demand (C,I,G,X) results in a greater final change in real GDP / national income

  3. Investment Output Savings Exports Imports Expenditure Income Government Spending Taxes Injections increase aggregate demand Leakages reduce aggregate demand The Multiplier Effect

  4. The Multiplier Effect • The size of the multiplier is determined by the size of the leakages from the circular flow of income • This is known as the marginal propensity to withdraw (MPW) and is made up of: • The marginal propensity to save (MPS) • The marginal propensity to tax (MPT) • The marginal propensity to import (MPM)

  5. The Accelerator Effect …is a theory that the level of investment depends on the rate change of national income Investment is needed for two purposes: • Replace capital stock • Provide new capital stock

  6. Limitations • Spare Capacity • Ignores confidence • Firms have a choice to/not to invest • Investment may be small and not have an effect

  7. Plenary - Multiplier and Accelerator Define: the multiplier & the accelerator Explain one weakness of each

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