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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. (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.
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
Step 3
If investment in the economy increases by €10 million, what is the increase in National Income? Show your workings.
Answer
To find the increase in National Income, we multiply the increase in investment by the multiplier:
Substituting the values:
Therefore, the increase in National Income is €25 million.