The transcript states that the final output level is "Y1 + 500 million". Therefore, it's Y1 plus 500. Y2 represented the initial impact of the £100 million government spending before the multiplier effect took hold.
This video explains the multiplier and accelerator effects in macroeconomics. The multiplier effect describes how changes in aggregate demand lead to larger changes in national output due to a cycle of increased spending and income generation. The accelerator effect focuses on investment and its link to GDP growth rates, showing how increasing growth encourages investment, while decreasing growth discourages it.
Definition: A process where initial changes in aggregate demand (AD) lead to a larger change in national output (GDP). This occurs because increased spending creates income for others, who then spend a portion of that income, creating further income and spending. This continues in a cycle.
Mechanism:
Equation: The multiplier (k) can be calculated in two ways:
k = 1 / (1 - MPC) where MPC is the marginal propensity to consume (the fraction of extra income spent).k = 1 / MPW where MPW is the marginal propensity to withdraw (the sum of the marginal propensities to save, tax, and import).MPC's Influence: A higher MPC leads to a larger multiplier effect because more of the extra income is spent, fueling the cycle.
Diagrammatic Representation: An initial shift in AD to the right (due to the initial injection) leads to a larger final shift in AD, representing the multiplier effect's impact on the equilibrium output level.
Definition: Investment is directly linked to changes in the rate of GDP growth. Rapid growth encourages investment, while slowing or negative growth discourages it.
Mechanism:
Key Difference from Multiplier: The multiplier focuses on consumer spending's ripple effect, while the accelerator emphasizes investment decisions based on growth rate changes.
Diagrammatic Representation: Not explicitly shown in the provided transcript, but conceptually, the accelerator effect would show how changes in investment (a component of AD) influence the slope and magnitude of AD shifts, particularly during periods of expanding and contracting economic activity.
The size of the multiplier (and therefore the magnitude of the multiplier effect) is influenced by:
Essentially, anything that reduces the amount of money recirculated within the economy (saving, taxation, imports) will decrease the multiplier.
Both the multiplier and accelerator effects can be used to explain the cyclical nature of economic activity (booms and recessions). The initial shock (positive or negative) is amplified by the multiplier, and investment decisions are further influenced by the accelerator effect, leading to potentially larger fluctuations in GDP.
Definition: A process where initial changes in aggregate demand (AD) lead to a larger change in national output (GDP). This occurs because increased spending creates income for others, who then spend a portion of that income, creating further spending. This continues in a cycle.
Mechanism:
Equation: The multiplier (k) can be calculated in two ways:
k = 1 / (1 - MPC) where MPC is the marginal propensity to consume (the fraction of extra income spent).k = 1 / MPW where MPW is the marginal propensity to withdraw (the sum of the marginal propensities to save, tax, and import).MPC's Influence: A higher MPC leads to a larger multiplier effect because more of the extra income is spent, fueling the cycle.
Diagrammatic Representation: An initial shift in AD to the right (due to the initial injection) leads to a larger final shift in AD, representing the multiplier effect's impact on the equilibrium output level.
Definition: Investment is directly linked to changes in the rate of GDP growth. Rapid growth encourages investment, while slowing or negative growth discourages it.
Mechanism:
Key Difference from Multiplier: The multiplier focuses on consumer spending's ripple effect, while the accelerator emphasizes investment decisions based on growth rate changes.
Diagrammatic Representation: Not explicitly shown in the provided transcript, but conceptually, the accelerator effect would show how changes in investment (a component of AD) influence the slope and magnitude of AD shifts, particularly during periods of expanding and contracting economic activity.
The size of the multiplier (and therefore the magnitude of the multiplier effect) is influenced by:
Essentially, anything that reduces the amount of money recirculated within the economy (saving, taxation, imports) will decrease the multiplier.
Scenario: The government injects £100 million into the economy. The MPC is 0.8 (80% of extra income is spent).
Calculation:
k = 1 / (1 - 0.8) = 5£100 million * 5 = £500 millionExplanation: The initial £100 million injection leads to £80 million being spent. This £80 million becomes income, leading to further spending of £64 million, and so on. The cumulative effect of this repeated spending is a total increase in national output of £500 million.
Diagram: The initial injection shifts AD to the right by £100 million. The multiplier effect causes a further rightward shift, resulting in a final increase in national output of £500 million, considerably larger than the initial government injection. This is visualized as a shift from Y1 to Y1 + £500 million on a Real GDP axis.
Both the multiplier and accelerator effects can be used to explain the cyclical nature of economic activity (booms and recessions). The initial shock (positive or negative) is amplified by the multiplier, and investment decisions are further influenced by the accelerator effect, leading to potentially larger fluctuations in GDP.