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Question 5 (a)
The multiplier formula for an open economy is $$\frac{1}{MPS + MPM}$$ Assume the MPM is 0.25 and MPS is 0.15. (i) Explain the term multiplier. (ii) Using the for... show full transcript
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The multiplier is an economic concept that measures how much total national income increases in response to a given increase in investment or spending. It reflects the relationship between an initial change in spending and the resulting increase in income. When an injection of spending occurs, it gets circulated within the economy, leading to additional consumption and further income generation. In essence, the multiplier effect amplifies the initial amount introduced to the economy.
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To find the increase in National Income, we can use the multiplier calculated above:
Substituting the values:
Therefore, the increase in National Income is €25 million.
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