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The ‘Multiplier effect’ tells us by how much National Income will increase, following a given injection into the economy (e.g - Leaving Cert Economics - Question 6 - 2011
Question 6
The ‘Multiplier effect’ tells us by how much National Income will increase, following a given injection into the economy (e.g. an increase in government spending). ... show full transcript
Worked Solution & Example Answer:The ‘Multiplier effect’ tells us by how much National Income will increase, following a given injection into the economy (e.g - Leaving Cert Economics - Question 6 - 2011
Step 1
Explain the underlined term.
Answer
The 'Multiplier effect' is an economic concept that refers to how an initial increase in spending (an injection into the economy) can lead to a larger overall increase in economic activity and national income. It operates on the principle that when one entity spends money, it circulates within the economy, creating further income and spending by others.
Step 2
Outline two economic effects which an injection may have on an economy.
Answer
- Increased Demand: An injection of funds leads to heightened demand for goods and services, stimulating production and creating jobs.
- Increased Savings: As individuals receive income from new jobs created by the injection, they may save a portion of it, further contributing to economic growth by increasing the funds available for investment.
Step 3
Calculate the new level of National Income. (Show your workings.)
Answer
To find the new level of National Income, we apply the formula:
New National Income = Initial National Income + (Injection × Multiplier)
Given:
- Initial National Income = €600m
- Injection = €20m
- Multiplier = 2
Calculation:
New National Income = €600m + (€20m × 2) = €600m + €40m = €640m
Step 4
State and explain two reasons for the falling demand for residential property.
Answer
- Higher Interest Rates: Increased interest rates have resulted in higher borrowing costs, discouraging potential buyers from purchasing homes, leading to decreased demand in the housing market.
- Economic Recession: During economic downturns, uncertainty makes individuals hesitant to invest in property, leading to reduced purchasing activity.
Step 5
State and explain one reason for the growth in these ‘ghost estates’.
Answer
- Surplus of Houses: During economic booms, many houses were built, creating a surplus. As demand diminished, these unfinished developments became ‘ghost estates’, with abandoned housing projects remaining incomplete.
Step 6
Suggest two economic actions the Government could take in relation to these ‘ghost estates’.
Answer
- Demolish Unfinished Properties: This could reduce blight in urban areas and facilitate better land use for new developments.
- Complete Housing Developments: By finishing these estates, the government could provide necessary housing and potentially improve the real estate market.
Step 7
Explain each of the underlined terms.
Answer
- Opportunity Cost: This is the cost of the next best alternative foregone when making a decision, emphasizing trade-offs in resource allocation.
- Infrastructure: These are foundational services and facilities essential for the operation of an economy, like transportation and utilities.
Step 8
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