A2 Economics multiplier: multiple-choice question

Another example of a past Paper 3 question which has been quite popular in the last couple of exam sessions. I have changed the data from the original CAIE question.

The table shows the values of selected macroeconomic variable over a two-year period.

What is the value of the multiplier?

A. 3 – B. 4 – C. 6 – D. 12

From the data both years are in equilibrium Year 1 NI = 3800  –  Injections = 260+160+200 = 620 Withdrawals = 300+140+180 = 620 Year 2 NI = 4600  –  Injections = 360+210+250 = 820 Withdrawals = 350+210+260 = 820   The increase in injections has been 200 but the increase in NI has been 800 (4600-3800) – therefore the multiplier is 4 – (4 x 200 = 800).

The Multiplier Consider a $300 million increase in business capital investment. This will set off a chain reaction of increases in expenditures. Firms who produce the capital goods that are ultimately purchased will experience an increase in their incomes. If they in turn, collectively spend about 3/5 of that additional income, then $180m will be added to the incomes of others. At this point, total income has grown by ($300m + (0.6 x $300m). The sum will continue to increase as the producers of the additional goods and services realise an increase in their incomes, of which they in turn spend 60% on even more goods and services. The increase in total income will then be ($300m + (0.6 x $300m) + (0.6 x $180m). The process can continue indefinitely. But each time, the additional rise in spending and income is a fraction of the previous addition to the circular flow.

The value of the multiplier can be found by the equation ­1 ÷ (1-MPC) You can also use the following formula which represents a four sector economy 1 ÷ MPS+MRT+MPM

Source: CIE A Level Revision Guide – Susan Grant

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