The Multiplier formula for an open economy is:
$$Multiplier = \frac{1}{MPS + MPM}$$
(i) Explain each of the terms MPS and MPM - Leaving Cert Economics - Question c - 2019
Question c
The Multiplier formula for an open economy is:
$$Multiplier = \frac{1}{MPS + MPM}$$
(i) Explain each of the terms MPS and MPM.
Assume that MPS is 0.1 and MPM is 0... show full transcript
Worked Solution & Example Answer:The Multiplier formula for an open economy is:
$$Multiplier = \frac{1}{MPS + MPM}$$
(i) Explain each of the terms MPS and MPM - Leaving Cert Economics - Question c - 2019
Step 1
Explain each of the terms MPS and MPM.
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Answer
MPS (Marginal Propensity to Save) refers to the proportion of additional income that is saved rather than spent. In simpler terms, it indicates how much of extra income consumers choose to save.
MPM (Marginal Propensity to Import) represents the proportion of additional income that is spent on imports. This shows how much extra income consumers allocate to purchasing goods and services from abroad instead of domestically.
Step 2
Calculate, using the above formula, the size of the Multiplier. Show your workings.
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Answer
To calculate the Multiplier, we use the formula:
Multiplier=MPS+MPM1
Substituting the values: Multiplier=0.1+0.41 Multiplier=0.51 Multiplier=2
Therefore, the size of the Multiplier is 2.
Step 3
Explain the meaning of your answer.
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Answer
This means that for every £1 spent in the economy, National Income will increase by £2. It demonstrates the concept of the Multiplier effect, where initial spending leads to greater overall increases in income within the economy.
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