Download 70 Multiplier

70. Multiplier (including calculations)
1. Missing Words.
The process by which changes in any of the autonomous components of ______________________ demand lead
to a greater change in the national income.
In a closed economy the multiplier formula is
or
. This is when there is no government sector or
trade. Consumers can spend or save.
If the Marginal Propensity to Consume (MPC) is 0.9, then the Marginal Propensity to Save (MPS) is ________. The
multiplier can be calculated as _____________. In other words every £1 of additions to aggregate demand will
eventually cause £10 of extra spending.
2. Complete the following table for an economy with an MPC of 0.8, with an initial increase in injections of
£100. Therefore the multiplier is 5.0.
Round
∆ in Injection
∆ in Income
∆ in Consumption
∆ in Savings
1
£100
£100
£
£
2
£
£
£
3
£
£
£
4
£
£
£
£
£
£
And so on until ….
…final total after all
rounds completed
3. Factors that determine the size of the Multiplier
3.1 Identify three factors that determine the size of the multiplier
1.
2.
3.
3.2 Answer the following questions based on the extract below.
Up to 10,000 jobs could be lost in Plymouth if Devonport Naval Base closes, according to a new report. The report
by the University of Plymouth Business School states that the base's facilities support nearly 24,000 jobs in the local
economy. There are 4,036 personnel on ships and submarines which are based in Devonport. Source: The Herald,
Plymouth, 21 July 2008
1. Explain why more jobs are lost in Plymouth than are directly employed at Devonport. ____________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
2. Based on the employment figures at Devonport and the jobs in the local economy. Calculate the multiplier in
Plymouth. __________________________________
3. What factors might determine the size of the multiplier in Plymouth? _________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
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70. ANSWERS: Multiplier
1. The process by which changes in any of the autonomous components of Aggregate Demand lead to a greater
change in the national income.
In a closed economy the multiplier formula is
government sector or trade. Consumers can spend or save.
or
This is when there is no
Therefore if the Marginal Propensity to Consume (MPC) is 0.9, then the Marginal Propensity to Save (MPS) is 0.1
The multiplier can be calculated as 10.
2. Complete the following table for an economy with an MPC of 0.8, with an initial increase in injections of £100.
The multiplier is 5
Round
∆ in Injection
∆ in Income
∆ in Consumption
∆ in Savings
1
£100
£100
£80
£20
2
£80
£64
£16
3
£64
£51 (£51.20)
£13 (£12.80)
4
£51
£41 (£40.80)
£10 (£10.20)
Final Total after all
rounds completed
£500
£400
£100
3. Factors that determine the size of the Multiplier
3.1 Identify three factors that determine the size of the multiplier
1.Size of savings
2. Size of taxation
3. Size of imports
3.2
1. Explain why more jobs are lost in Plymouth than are directly employed at Devonport. The naval base’s
employees will spend their income in the local area, in shops, supermarkets, pubs, using leisure
facilities and employing people indirectly.
2. Based on the employment figures at Devonport and the jobs in the local economy. Calculate the multiplier in
Plymouth. 24000 Plymouth jobs/4036 Naval personnel = 5.95
3. What factors might determine the size of the multiplier in Plymouth? The size of leakages from the local
economy such as taxation, but also spending outside of Plymouth in neighbouring towns.
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