MACROECONOMICS: Consumption, The Multiplier Effect and The Accelerator Theory – Flashcards
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Equilibrium
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X + G + I = M + T + S =
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GDP rises
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X + G + I > M + T + S =
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GDP falls
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X + G + I < M + T + S =
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The money that is left over for consumers to spend after tax, national insurance, mortgages have been paid
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Define 'disposable income'
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Interest rates, inflation, tax rates, income, wealth effect, consumer expectations, availability of credit
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Name the 7 factors which affect consumption
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Consumers change their level of consumption when their wealth changes
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What is the wealth effect?
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When an increase or decrease in the components of aggregate demand, usually investment, government spending or exports, leads to a larger than proportionate change in national income
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What is the multiplier effect?
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A business invests in opening a new factory > employment and wages increase > people spend more on goods and services > demand increases
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Give an example of how the multiplier effect works
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Change in national income / change in spending
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Multiplier effect =
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Reduce the rate of income tax, increase government spending
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Name two ways the government may encourage consumers to spend more
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Investment, consumption, government spending, tax, exports, imports
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What are the 6 types of multipliers?
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Spending multipliers
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The investment multiplier and consumption multiplier are
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Fiscal policy multipliers
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The government spending multiplier and tax multiplier are
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Foreign trade multipliers
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The export multiplier and import multiplier are
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Work in reverse
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The multiplier effect can also
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When withdrawals like tax or imports increase
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When does the multiplier effect work in reverse?
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Demultiplier effect
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What is a reverse multiplier effect called?
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When an increase in national income causes further investment by businesses to ensure they have the stock of capital to maintain output
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What is the Accelerator Theory?
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Multiplier > spending rises > GDP rises but accelerator > GDP rises > investment rises
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What is the difference between an accelerator and a multiplier?
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An accelerator can be caused by a multiplier
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How are accelerators and multipliers linked?
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Marginal Propensity to Consume
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MPC =
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Marginal Propensity to Save
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MPS =
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The fraction of an increase in income that people plan to spend on goods and services
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What is MPC?
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The fraction of an increase in income that people plan to save
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What is MPS?
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0.2
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Eg. If people plan to spend 20p of an income increase of £1 then MPC is
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0.4
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Eg. If people plan to save 40p of an income increase of £1 then MPS is
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0.8
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Eg. If MPC is 0.2 then MPS is
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0.6
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Eg. If MPS is 0.4 then MPS is
