The multiplier formula for an open economy is
$$\frac{1}{MPS + MPM}$$
Assume the MPM is 0.25 and MPS is 0.15 - Leaving Cert Economics - Question 5 (a) - 2017
Question 5 (a)
The multiplier formula for an open economy is
$$\frac{1}{MPS + MPM}$$
Assume the MPM is 0.25 and MPS is 0.15.
(i) Explain the term multiplier.
(ii) Using the for... show full transcript
Worked Solution & Example Answer:The multiplier formula for an open economy is
$$\frac{1}{MPS + MPM}$$
Assume the MPM is 0.25 and MPS is 0.15 - Leaving Cert Economics - Question 5 (a) - 2017
Step 1
Explain the term multiplier.
96%
114 rated
Only available for registered users.
Sign up now to view full answer, or log in if you already have an account!
Answer
The multiplier is an economic concept that measures how much total national income increases in response to a given increase in investment or spending. It reflects the relationship between an initial change in spending and the resulting increase in income. When an injection of spending occurs, it gets circulated within the economy, leading to additional consumption and further income generation. In essence, the multiplier effect amplifies the initial amount introduced to the economy.
Step 2
Using the formula above calculate the size of the multiplier. Show your workings.
99%
104 rated
Only available for registered users.
Sign up now to view full answer, or log in if you already have an account!
Answer
To calculate the size of the multiplier, we use the formula:
Multiplier=MPS+MPM1
Substituting the values:
Multiplier=0.15+0.251=0.401=2.5
Thus, the size of the multiplier is 2.5.
Step 3
If investment in the economy increases by €10 million, what is the increase in National Income? Show your workings.
96%
101 rated
Only available for registered users.
Sign up now to view full answer, or log in if you already have an account!
Answer
To find the increase in National Income, we can use the multiplier calculated above:
Increase in National Income=Investment×Multiplier
Substituting the values:
Increase in National Income=€10 million×2.5=€25 million
Therefore, the increase in National Income is €25 million.
Join the Leaving Cert students using SimpleStudy...
