The multiplier process

Overview

Recall questions on the multiplier ratio, why each round of spending is smaller than the last, and which components it amplifies.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is the multiplier ratio?

   Model answer

   The number by which an initial change in spending is multiplied to give the final change in national income.

2. 2

   In the multiplier process, what happens to the income of those who first receive an injection into the circular flow?

   Model answer

   Their income increases by the amount of the initial injection.

3. 3

   After receiving additional income, what do households do with a proportion of it in the multiplier process?

   Model answer

   They spend a proportion of the additional income on consumption.

4. 4

   When households spend their additional income, what does this spending become for others in the economy?

   Model answer

   It becomes income for other households and firms.

5. 5

   Why does each successive round of spending in the multiplier process become smaller than the previous round?

   Model answer

   Because withdrawals (saving, taxation, and imports) remove a portion of income at each round, leaving less to be spent.

6. 6

   How does the final change in national income compare to the initial injection in the multiplier process?

   Model answer

   The final change in national income exceeds the initial injection.

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