The national income multiplier and marginal propensities

Overview

Recall questions on the national income multiplier, marginal and average propensities to consume, save, tax, import and withdraw, and multiplier calculations.

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

   Define the national income multiplier.

   Model answer

   The national income multiplier is the number of times an initial change in an injection is multiplied to give the eventual change in national income.

2. 2

   Why does an injection raise national income by more than the injection itself?

   Model answer

   The initial spending becomes income for someone else, part of which is spent again, so successive and progressively smaller rounds of income and spending are generated.

3. 3

   State the multiplier formula in terms of the marginal propensity to withdraw, and in terms of the marginal propensity to consume where saving is the only withdrawal.

   Model answer

   The multiplier equals 1 ÷ marginal propensity to withdraw, which in a closed economy with no government becomes 1 ÷ (1 − marginal propensity to consume).

4. 4

   Name the three marginal propensities that together make up the marginal propensity to withdraw.

   Model answer

   The marginal propensities to save, to tax and to import.

5. 5

   State three factors that determine the size of the national income multiplier.

   Model answer

   The marginal propensity to consume domestically produced goods, the marginal rate of taxation, and the amount of spare capacity available in the economy.

6. 6

   Why is the multiplier smaller in an economy with a high propensity to import?

   Model answer

   A larger share of each round of extra spending leaks abroad to foreign producers instead of becoming income for domestic households and firms.

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