Transcript Chapter 30
The Multiplier Powerpoint produced by Rachel Farrell (PDST) & Aoife Healion (SHS, Tullamore) Source of information: SEC Marking Schemes COLLATED EXAM QUESTIONS ORDINARY LEVEL HIGHER LEVEL John Maynard Keynes (1883-1946) • Keynes lived during an era of great economic change and upheaval – the post-war changes in the 1920’s and the depression of the 1930’s, when there was a loss of faith in classical economic doctrine. • A new approach was sought by many governments and economists. • Keynes provided this alternative which has resulted in the modern mixed economy such as exists in Ireland and the UK today. • New Economic Concepts 1. The Multiplier • He developed new tools to explain his theories including the multiplier. • Any initial increase in spending will cause a much greater increase in GNP due to the fact that one person’s expenditure is another person’s income. He developed concepts such as: MPC, MPM, etc. 2. Output is demand determined. The size of national income depends on expenditure i.e. Y = C + I + G + X − M Injection into the CFI Relationship The Multiplier Keynes National Income Increase The Multiplier 2006 Q 4 (b) (i) • Shows the precise relationship between an initial injection into the circular flow of income and the eventual total increase in national income. • Eg. • An in injection of 3 million may increase the NI by 6 million (multiplier = 2) Formula 1 MPS + MPM + MPT or 1 1 - (MPC-MPM-MPT) Note: A closed economy will have no imports MPC • Marginal Propensity to consume. • This is the portion of each additional unit of income which is spent. MPC = change in consumption change in income MPM • Marginal Propensity to Import. • This is the proportion of each additional unit of income which is spent on imports. MPM = change in imports change in income MPS • Marginal Propensity to Save. • This is the proportion of each additional unit of income which is saved. MPC = change in savings change in income MPT • Marginal Propensity to Tax. • This is the proportion of each additional unit of income which is taxed. MPC = change in tax change in income 2008 OL SQ 9 A 2011 HL Q7 (b) Remember! 2011 HL Q7 (b) 2010 HL SQ 6 2006 HL Q 4 (b) Remember! 2005 HL Q 6 (b) MPS = 1 – MPC 1-0.9 = 0.1 2002 HL SQ 8 4, 050 – 3,750 4,600 – 4,200 Change in C Change in Y 2002 HL SQ 8 2002 HL SQ 8 2002 HL SQ 8