Question

Identify one economic injector or withdrawal and explain how it affects the economy through a multiplier effect.

Short examples or answers

Answer 1

Economic injectors:

The variables which increases money flow or finance in the economy.

e.g. Investment ( I )

Govt expdt ( G )

Export. ( X )

Economic withdrawal:

The variables which reduces or because of them money flows out of circular flow .

e g Savings (S)

Taxes (T)

Import (M)

Consider investment for further explaination

Multiplier effect of investment

Investment multiplier is denoted by K . It is the ratio of change in income and change in investment.

K = change in Y / change in investment

It helps to calculate the resultant increase in income because of change in investment.

It depends on marginal propensity to consume (MPC) or marginal propensity to save (MPS).

K = 1/1-b

Where b=mpc

Or K = 1/mps

When mps increases,value of K decreases.

If mpc increases, value of K also increases.

Its working can be explained as following:

Assume, change in investment =$100

MPC = 0.5

The total increase in income will be:

Round	change in investment	change in income	change in consumption
I	100	100	50
II	-	50	25
III	-	25	12.5
IV	-	12.5	......
V	-	........	......
VI	-	........	.....
Total	100	200	1​​​​​00

As we can see in the schedule, the change in investment has increased national income in different rounds.

In the above schedule,consumption in one round will become change in income in next round because consumption of one in the economy is income of other.

Total increase in income = K (change in I )

K = 1/1-b = 1/1-0.5 =2

Thus,income will increase by 2 times change in investment.

Change in income = 2 * 100

Change in income = $200

Thus if multiplier is high ,the increase in income will also be more and vice versa.