Understanding and Calculating the Multiplier Effect Using the Marginal Propensity to Consume

The video tutorial covers the multiplier effect, explaining how expenditure leads to increased national income. It discusses the circular flow of income, highlighting the role of withdrawals and injections. The marginal propensity to consume (MPC) is introduced as a key factor in determining the multiplier effect. The tutorial illustrates the concept with examples and provides a formula for calculating the multiplier effect based on MPC. The video aims to help students define, understand, and calculate the multiplier effect, emphasizing its significance in economic activity.

What is the primary factor that determines the size of the multiplier effect?

• The marginal propensity to consume

• The rate of inflation

• The level of government spending

• The amount of exports

Which of the following is NOT a withdrawal from the circular flow of income?

• Investment

• Imports

• Savings

• Taxes

In the example with a marginal propensity to consume of 0.6, what is the initial amount spent?

• £2500

• £1500

• £1000

• £600

How does a reduction in interest rates affect aggregate demand according to the multiplier effect?

• It has no effect on aggregate demand

• It decreases aggregate demand

• It causes an outward shift in aggregate demand

• It causes an inward shift in aggregate demand

What is the formula used to calculate the multiplier effect?

• 1 / (1 + MPC)

• 1 / (1 - MPC)

• MPC / (1 - MPC)

• MPC / (1 + MPC)

If the marginal propensity to consume is 0.9, what is the multiplier effect?

• 9

• 5

• 10

• 11

What is the final outcome if the initial stimulus is 100 and the multiplier is 1.25?

• 100

• 125

• 150

• 200