Maths Trial Paper
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- Date Submitted: 08/14/2013 08:38 PM
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* The simple multiplier: k = 1/(1-MPC)
* Changing levels of growth: the multiplier
* Whenever savings (S) is not equal to investment (I), the economy will be disrupted from its state of equilibrium. The Circular flow model suggests that the economy will move towards a state of equilibrium (it would move towards equilibrium at a higher level of economic activity hen the injection of I is greater than the leakage S, and at a lower level of economic activity when injection I is than leakage S
* The concept takes place by the multiplier process:
* When there is a shock to the economy (i.e. changes in consumer or business expectations, interest rates or government policies, there will be a change in injections and leakages. E.g. lower interest rates will increase business investment and expenditure which would provide increased income for individuals, who hen consume more, which will further increase expenditure and income and so on. This process does not continue forever as each time the injection moves around the economy, its impact on expenditure gets smaller as part of the income is saved rather than consumed (MPS). This savings component is a leakage that reduces the effect of the higher investment on national income
* The multiplier is the number of times the trial increase in national income exceeds the initial increase in expenditure that is caused (e.g. if aggregate demand increased by $1000 and through the multiplier process the national income rose by $10000, the multiplier would be 10)
* To calculate how changes in injection or leakage has a multiplied impact on income we need to consider two more concepts
* The Marginal Propensity to Consume (MPC), which is the proportion of each extra dollar (increase in disposable income) of income that is spent on goods and services
* The Marginal Propensity to Save (MPS), which is the proportion of each extra dollar (increase in disposable income) of income that is saved
* MPC+MPS=1...
* Changing levels of growth: the multiplier
* Whenever savings (S) is not equal to investment (I), the economy will be disrupted from its state of equilibrium. The Circular flow model suggests that the economy will move towards a state of equilibrium (it would move towards equilibrium at a higher level of economic activity hen the injection of I is greater than the leakage S, and at a lower level of economic activity when injection I is than leakage S
* The concept takes place by the multiplier process:
* When there is a shock to the economy (i.e. changes in consumer or business expectations, interest rates or government policies, there will be a change in injections and leakages. E.g. lower interest rates will increase business investment and expenditure which would provide increased income for individuals, who hen consume more, which will further increase expenditure and income and so on. This process does not continue forever as each time the injection moves around the economy, its impact on expenditure gets smaller as part of the income is saved rather than consumed (MPS). This savings component is a leakage that reduces the effect of the higher investment on national income
* The multiplier is the number of times the trial increase in national income exceeds the initial increase in expenditure that is caused (e.g. if aggregate demand increased by $1000 and through the multiplier process the national income rose by $10000, the multiplier would be 10)
* To calculate how changes in injection or leakage has a multiplied impact on income we need to consider two more concepts
* The Marginal Propensity to Consume (MPC), which is the proportion of each extra dollar (increase in disposable income) of income that is spent on goods and services
* The Marginal Propensity to Save (MPS), which is the proportion of each extra dollar (increase in disposable income) of income that is saved
* MPC+MPS=1...