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QLDEconomicsQuick questions
Unit 2: Modified markets
Quick questions on The expenditure multiplier and national income (QCE Economics Unit 2)
6short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is the multiplier formula?Show answer
The multiplier (k) is the reciprocal of the marginal propensity to withdraw:
What is bigger leakages mean a smaller multiplier?Show answer
The more income that leaks out at each round (into saving, tax or imports), the less is re-spent, so the multiplier is smaller. This is why the Australian multiplier is modest: Australia has a relatively high marginal propensity to import (a large share of manufactured goods are imported), so a good deal of each extra dollar leaks overseas rather than re-circulating domestically.
What is application to policy?Show answer
The multiplier explains why discretionary fiscal policy can have an amplified effect on AD and why the composition of spending matters.
What is q1?Show answer
Define the marginal propensity to consume and the marginal propensity to save, and state the relationship between them when saving is the only leakage. [3 marks]
What is q2?Show answer
An economy has MPS of 0.2, MPT of 0.2 and MPM of 0.1. Calculate the multiplier and the change in national income from a $5 billion increase in government spending. [3 marks]
What is q3?Show answer
Explain why the Australian expenditure multiplier is relatively modest, and why the composition of fiscal stimulus affects its size. [5 marks]
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