Question 1

What is the multiplier effect?

Accepted Answer

The multiplier effect is the idea that an initial change in spending will set off a spending chain that is magnified in the economy.

Question 2

What is marginal propensity to consume (MPC)?

Accepted Answer

How much people consume rather than save when they gain disposable income

(earning an extra $100 and spending $20 -> MPC=0.2)

Question 3

What is marginal propensity to save (MPS)?

Accepted Answer

How much people save rather than consume when they gain disposable income

(earning an extra $100 and spending $20 -> MPS=0.8)

Question 4

What is the relationship between MPC and MPS?

Accepted Answer

MPC and MPS are inversely related, meaning that an increase in MPC will lead to a decrease in MPS and vice versa

MPC + MPS = 1

Question 5

How do you calculate MPC?

Accepted Answer

By dividing the change in consumption by the change in disposable income.

MPC = Change in Consumption / Change in Disposable Income

Question 6

What does a high MPC indicate?

Accepted Answer

A high MPC indicates a high level of consumer spending.

Question 7

What is the spending multiplier?

Accepted Answer

The ratio of how much the GDP changes to how much spending changes

(with a spending multiplier of 5, an extra $100 of spending will increase the GDP by $500)

Question 8

How do you calculate the spending multiplier?

Accepted Answer

Question 9

What is the tax multiplier?

Accepted Answer

The factor by which a change in taxes will alter GDP

(with a tax multiplier of -5, a $100 cut in taxes will increase GDP by $500)

Question 10

What is the formula for the Tax Multiplier?

Accepted Answer

Question 11

Why are tax multipliers smaller than spending multipliers?

Accepted Answer

Spending multipliers have an immediate impact on the economy, but tax multipliers first have to go through someone's income before having an impact on the economy

Question 12

How do income taxes influence consumer spending?

Accepted Answer

Increased taxes reduce consumer spending

Reduced taxes increase consumer spending

3.2 Multipliers, AP Macroeconomics Flashcards