the multiplier process & circular flow of income

what is overshooting?

- if the value of the multiplier is underestimated then AD will rise by too much resulting in Demand-Pull inflation

what are injections into the CFI?

- reasons why money will come into the Circular flow of income = investment = government spending = exports

what does the size of the multiplier depend upon?

- the % of national income withdrawn

definition of the multiplier?

- the amount by which an initial change in AD must be multiplied to find the eventual change in national income

how can the government use the multiplier?

- the government can use the multiplier to determine their economic policy - can for example, decide how much to increase or decrease their spending by

definition of a negative multiplier process?

- when an initial decrease in an injection (or increase in a leakage) leads to a great final DEcrease in GDP

definition of a positive multiplier process?

- when an initial increase in an injection (or decrease in a leakage) leads to a greater final increase in GDP

what are withdrawals from the CFI?

- withdrawals are why national income doesn't keep on rising forever - money that leaks out of the circular flow of income in the form of = saving = taxation = imports

example of a positive multiplier?

1- government increase spending 2- this increases national income 3- higher incomes means increase in C 4- results in an increase of AD 5- firms have more orders and so need to produce more 6- to produce more firms will need to employ more people = POSITIVE MULTIPLIER EFFECT

example of a negative multiplier effect?

1- lower government spending 2- lower national income 3- lower income means less C 4- decrease in AD 5- firms will have falling orders and will need to produce less 6- firms will employ less people = NEGATIVE MULTIPLIER EFFECT

definition of the circular flow of income?

The circular flow of income shows connections between different sectors of our economic system. It revolves around flows of goods and services and factors of production between firms and households.

what is the formula for the multiplier?

final change in GDP / initial change in AD

definition of the multiplier process?

the mechanism by which a change in AD eventually leads to an even greater change in national income (GDP)

when does GDP increase?

when injections > withdrawals

when does GDP decrease?

when withdrawals> injections