Economics Unit 1

Front 1

The multiplier

Back 1

The fiscal multiplier effect occurs when an initial injection into the economy causes a bigger final increase in national income.

For example, increased government expenditure might result in increased employment levels, which could in turn stimulate increased consumption, which could then result in further increases in investment and investment

Evaluation:
-Depend on the marginal propensity to consume, the proportion of any extra income spent, if a worker saved all his money there wouldn’t be an increase in GDP

-Depends on the size of leakages (savings, imports, tax)

-The multiplier will also be effected by the amount of spare capacity if the economy is close to full capacity an increase in injections will only cause inflation.

-Monetarists argue the fiscal multiplier will be limited by the crowding out effect. E.g. if the government increase Aggregate Demand through higher spending or tax cuts then this increases consumer spending. However, the rise in borrowing (and higher bond yields) leads to a decline in private sector investment. Therefore, there is no overall increase in AD.

-Time Lag, takes a while to come into full effect

Front 2

Causes and
constraints on
growth

Back 2

Causes:
Short Term increase in AD:

Front 3

f

Back 3

f