Understanding the Multiplier Effect

What is the fiscal multiplier effect?

• An increase in taxes leading to a decrease in GDP

• A decrease in government spending leading to higher unemployment

• An initial injection into the economy causing a bigger final increase in national income

• A rise in imports causing a decrease in national income

If the government spends £3 billion on the NHS, what is the initial increase in national income?

• £2 billion

• £3 billion

• £1 billion

• £4 billion

What happens when workers spend part of their extra income in the economy?

• It results in higher taxes

• It causes a further injection into the economy

• It leads to a decrease in GDP

• It reduces the multiplier effect

What is the multiplier effect when the government spends £3bn on building roads and GDP rises by £4bn?

• 1.5

• 1.33

• 1.25

• 1.7

Which of the following is NOT an injection into the economy?

• Exports (X)

• Government Spending (G)

• Investment (I)

• Imports (M)

What is the Marginal Propensity to Consume (mpc)?

• A person's willingness to save money

• The percentage of income imported

• The percentage of income taxed

• A person's willingness to spend money

If mpt = 0.4, mpm = 0.3, and mps = 0.1, what is the marginal propensity to withdraw (mpw)?

• 0.7

• 0.9

• 0.6

• 0.8

What effect does a tax cut have on consumer spending?

• It increases consumer spending

• It decreases consumer spending

• It has no effect on consumer spending

• It only affects government spending

What is the crowding out effect?

• A decrease in imports due to higher taxes

• An increase in private sector investment due to government spending

• A decline in private sector investment due to increased government borrowing

• An increase in exports due to higher government spending

According to Keynesians, why is the crowding out effect limited during a recession?

• Because government spending is reduced

• Because taxes are increased

• Because imports are decreased

• Because the private sector has a glut of non-productive savings