The multiplier

Which one point on the trade cycle diagram above illustrates a boom?

In July 2020 a survey estimated that the marginal propensity to consume in the UK was 0.1.

(Source: adapted from https://ifs.org.uk/uploads/WP202035-MPCs-through-COVID-spending-saving-and-private-transfers.pdf)

Calculate the total increase in aggregate demand from an increase in government spending of £60 million.

UK consumption, % of GDP, 2004–2021

(Source: adapted from https://data.worldbank.org/indicator/NE.CON.TOTL.ZS?end=2021& locations=GB&start=2002)

Which one of the following is an example of consumption?

With reference to the chart on the previous page, explain the likely effect of a fall in the marginal propensity to consume on the level of real GDP. Refer to the multiplier in your answer.

According to the Bank of England, the UK’s marginal propensity to consume is estimated to be 0.64.

(Source: adapted from https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2017/the-consumption-response-to-positive-and-negative-income-changes.pdf?)

Using the information above, calculate the total reduction in the UK’s GDP from a fall in government spending of £20 million.

Which one of the following is an injection into the circular flow of income?

After the Global Financial Crisis of 2008, the US President introduced expansionary fiscal policies of $800 billion. The International Monetary Fund estimated that the multiplier at the time was approximately 1.5.

(Source adapted from: https://www.economist.com/the-economist-explains/2016/09/07/ what-is-the-keynesian-multiplier)

Which one of the following is a withdrawal from the circular flow of income?

Calculate the total final increase in US aggregate demand as a result of the President’s ‘expansionary fiscal policies’, assuming no other changes.

Explain the impact of annual fiscal deficits on the US national debt.

The planned investment in the redevelopment of Dover Port will cost £115 million. The Chief Executive said it will lead to many ‘new job opportunities for local people and a transformed waterfront experience’ with new cafés, bars, and shops.

(Source adapted from: https://www.kentonline.co.uk/dover/news/docklands‑ redevelopment‑work‑to‑start‑118581/)

If the value of the multiplier is 1.8, which one of the following will be the total increase in GDP from the redevelopment, assuming other things are equal?

Using the example above, explain how the multiplier process leads to an increase in aggregate demand.

The planned investment in the redevelopment of Dover Port will cost £115 million. The Chief Executive said it will lead to many ‘new job opportunities for local people and a transformed waterfront experience’ with new cafés, bars, and shops.

(Source adapted from: https://www.kentonline.co.uk/dover/news/docklands‑ redevelopment‑work‑to‑start‑118581/)

If the value of the multiplier is 1.8, which one of the following will be the total increase in GDP from the redevelopment, assuming other things are equal?

Using the example above, explain how the multiplier process leads to an increase in aggregate demand.

In 2016 the UK Chancellor of the Exchequer announced that the government would spend an extra £23 billion on innovation and infrastructure over the following five years.

Evaluate the likely economic effects of this planned increase in government expenditure.

The table below shows marginal propensity to save data for an economy.

Explain one possible reason for the changes in the marginal propensity to save as shown in the table.

Explain the likely effect of a fall in the marginal propensity to save on the value of the multiplier if other things remain equal.

An economy has marginal propensity to save of 0.1, marginal propensity to tax of 0.2 and marginal propensity to import of 0.1.

Which one of the following is the correct size of the multiplier?

A 0.4

B 0.6

C 1.7

D 2.5