Leaving Cert Economics Formulas: The multiplier formula for an op

The multiplier formula for an open economy is: $$ \text{Multiplier} = \frac{1}{MPS + MPM} $$ Assume the MPM is 0.25 and the MPS is 0.15 - Leaving Cert Economics - Question 5(a) - 2017

Question 5(a)

$The-multiplier-formula-for-an-open-economy-is:--$$-\text{Multiplier}-=-\frac{1}{MPS-+-MPM}-$$--Assume-the-MPM-is-0.25-and-the-MPS-is-0.15-Leaving Cert Economics-Question 5(a)-2017.png$

The multiplier formula for an open economy is: $$ \text{Multiplier} = \frac{1}{MPS + MPM} $$ Assume the MPM is 0.25 and the MPS is 0.15. (i) Explain the term mult... show full transcript

Worked Solution & Example Answer:The multiplier formula for an open economy is: $$ \text{Multiplier} = \frac{1}{MPS + MPM} $$ Assume the MPM is 0.25 and the MPS is 0.15 - Leaving Cert Economics - Question 5(a) - 2017

Step 1

Explain the term multiplier.

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Answer

The multiplier refers to the ratio of change in national income to the initial change in spending that caused it. In other words, it is a measure of how much economic activity increases as a result of an initial injection of spending, such as investment. The concept relies on the idea that an increase in spending will lead to income generation, which in turn fuels further spending and economic activity, leading to a greater overall impact on the economy.

Step 2

Using the formula above calculate the size of the multiplier. Show your workings.

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Answer

To calculate the multiplier, we use the formula:

$\text{Multiplier} = \frac{1}{MPS + MPM}$

Substituting the given values:

$\text{Multiplier} = \frac{1}{0.15 + 0.25} = \frac{1}{0.40} = 2.5$

Thus, the size of the multiplier is 2.5.

Step 3

If investment in the economy increases by €10 million, what is the increase in National Income? Show your workings.

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Answer

To find the increase in National Income, we multiply the increase in investment by the multiplier:

$\text{Increase in National Income} = \text{Investment} \times \text{Multiplier}$

Substituting the values:

$= €10 \text{ million} \times 2.5 = €25 \text{ million}$

Therefore, the increase in National Income is €25 million.

The multiplier formula for an open economy is: $$ \text{Multiplier} = \frac{1}{MPS + MPM} $$ Assume the MPM is 0.25 and the MPS is 0.15 - Leaving Cert Economics - Question 5(a) - 2017

Worked Solution & Example Answer:The multiplier formula for an open economy is: $$ \text{Multiplier} = \frac{1}{MPS + MPM} $$ Assume the MPM is 0.25 and the MPS is 0.15 - Leaving Cert Economics - Question 5(a) - 2017

Explain the term multiplier.

Using the formula above calculate the size of the multiplier. Show your workings.

If investment in the economy increases by €10 million, what is the increase in National Income? Show your workings.

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