# Economic Activity & The Multiplier Effect

?
What will be the consequences of a shift in the AD curve?
This will affect the equilibrium level of national income & lead to a change in economic activities.
1 of 12
What will happen if there's an increase in AD?
There will be increased consumption, output/production, use of FoP, employment & a decrease in unemployment.
2 of 12
When real output increases, firms generally have to employ more workers to produce the additional goods & services that output increase involves.
3 of 12
What will happen if there's a reduction in AD?
There will be decreased consumption, output/production, use of FoP, employment & increased unemployment.
4 of 12
What is the 'Multiplier'?
The relationship between a change in AD & the resulting, usually larger, change in national income.
5 of 12
Why is the final change in income greater than the initial injection into the economy?
The initial injection is spent & re-spent a number of times.
6 of 12
What is the size of the multiplier limited by?
How much is withdrawn from the circular flow at each round of spending.
7 of 12
How can the multiplier work in reverse?
An increase in withdrawals (or a reduction in injections) can reduce GDP greater than the size of the initial withdrawal.
8 of 12
What is the formula for calculating the size of the multiplier?
k = 1 / (1 - MPC)
9 of 12
What will be the 2 impacts of an increase in injections such as gvnmt. spending or investment?
1) The direct change in AD as a result of the injection (remember AD equation). 2) Indirect increase in income as a consequence of the multiplier effect.
10 of 12
What is the 'Marginal Propensity to Consume' (MPC)?
The fraction/proportion of an increase in disposable income that people plan to spend on domestically produced goods.
11 of 12
What is the effect of a higher MPC?
The higher the value of the multiplier.
12 of 12

## Other cards in this set

### Card 2

#### Front

What will happen if there's an increase in AD?

#### Back

There will be increased consumption, output/production, use of FoP, employment & a decrease in unemployment.

### Card 4

#### Front

What will happen if there's a reduction in AD?

### Card 5

#### Front

What is the 'Multiplier'?