CHAPTER 44
The Multiplier
LEARNING OBJECTIVES
Explain how a given increase in spending by government, investors, or foreigners may
cause a much larger (multiplied) effect on consumption and GDP.
OUTLINE OF CHAPTER
I. The Government Multiplier
Calculating the Multiplier
Limitations of the Multiplier
KEY TERMS
export multiplier
measures the total effect on national income as a result of a change in exports
government multiplier
government spending
measures the total effect on national income of an initial increase in investment
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Explain how a given increase in spending by government, investors, or foreigners may
cause a much larger (multiplied) effect on consumption and GDP.
1. Define the government multiplier. Explain how it calculates the total growth of national
income that results.
2. Define the investment multiplier. Explain how it calculates the total growth of national
spending multiplier.
3. Define the import multiplier. Explain how it calculates the total growth of national
income that results.
Discuss how the multiplied impact on the economic process may help push the economy up
rapidly or help push the economy down rapidly.
4. Describe the process of how the multiplier impacts the economy. Explain each step of
the process.
The multiplier process applies to any new increase in spending that was not initially
5. Explain how government would use knowledge of multiplier effect to stimulate the
economy. Slow down the economy.
List and describe limitations of the multiplier.
6. What happens to the multiplier if people do not spend much (or any) of their additions to
income? Explain.
7. What is the impact on the economy if the government has to borrow money to spend?
If increased government spending is financed through the sale of government bones, the
Appendix 44.1
The Accelerator
LEARNING OBJECTIVES FOR APPENDIX 44.1
Explain how a given increase in aggregate demand or national income may cause a much
larger (multiplied) effect on investment.
OUTLINE OF CHAPTER
I. The Accelerator Model
II. Calculation of the Accelerator
KEY TERM
Accelerator
the effect on investment of an increase in national income
ANSWERS TO APPENDIX 44.1 REVIEW QUESTIONS
Explain how a given increase in aggregate demand or national income may cause a much
larger (multiplied) effect on investment.
1. Describe what effect changing national income has on investment. Why is the impact on
investment larger than the change in income?
If national income rises slowly, investment is likely to rise slowly. If national income
2. How does a firm decide how much money to invest in future production?
Discuss the impact of the accelerator and how it may push the economy up rapidly or help
push the economy down rapidly.
3. If businesses are optimistic, how will that affect investment decisions? How will
investment decisions impact output?
4. If there is a sudden drop in investment, what will happen to other macroeconomic
measures of the economy?
List and describe limitations of the accelerator.
5. State some of the simplifying assumptions used to develop the multiplier. Explain what
happens if the assumptions do not hold.
The accelerator assumes the same capital/output ratio for the entire economy, and that
6. Explain how access to financing might impact investment and the accelerator.