The Multiplier Powerpoint produced by Rachel Farrell PDST

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 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