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Explain what is meant by the term ‘the multiplier’ - Leaving Cert Economics - Question b - 2006
Question b
Explain what is meant by the term ‘the multiplier’. State the formula by which the multiplier is measured in an open economy. Explain the variable elements in the fo... show full transcript
Worked Solution & Example Answer:Explain what is meant by the term ‘the multiplier’ - Leaving Cert Economics - Question b - 2006
Step 1
Explain what is meant by the term ‘the multiplier’
Answer
The multiplier refers to the concept that an initial increase in spending can lead to a larger overall increase in national income. This occurs because the initial spending generates additional income for others, who will then also spend part of that income, leading to further economic activity.
Step 2
Step 3
Explain the variable elements in the formula
Answer
The variables in the formula consist of the following:
- MPC (Marginal Propensity to Consume): This is the fraction of each additional unit of income that is consumed (spent).
- MPM (Marginal Propensity to Import): This indicates the portion of each additional unit of income that is spent on imports.
- MPS (Marginal Propensity to Save): This represents the fraction of each additional unit of income that is saved.
Step 4
Calculate the value of the multiplier in the Irish Economy. Show your workings.
Answer
To calculate the multiplier, we first need to find the values of MPC, MPM, and MPT:
Given: MPM = 0.4, MPT = 0.24, MPS = 0.26
Using the formula:
- Determine MPC:
- Apply the multiplier formula: ext{Multiplier} = rac{1}{1 - (MPC - MPT)} Substituting known values: ext{Multiplier} = rac{1}{1 - (0.74 - 0.24)} = rac{1}{1 - 0.5} = rac{1}{0.5} = 2.0