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The Multiplier Effect, MPC, and MPS Video Lecture | Economics CUET Preparation - Commerce
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FAQs on The Multiplier Effect, MPC, and MPS Video Lecture - Economics CUET Preparation - Commerce
| 1. What is the multiplier effect? |  |
Ans. The multiplier effect refers to the phenomenon where an initial increase in spending leads to a larger increase in overall economic activity. It occurs because each dollar spent by one individual or organization becomes income for another, who then spends a portion of it, creating a chain reaction of spending and increasing the total output in the economy.
| 2. How is the marginal propensity to consume (MPC) defined? | |
Ans. The marginal propensity to consume (MPC) is a concept that measures the change in consumer spending resulting from a change in income. It represents the proportion of additional income that individuals or households choose to spend rather than save. For example, an MPC of 0.80 means that for every additional dollar of income, individuals will spend 80 cents and save the remaining 20 cents.
| 3. What is the meaning of marginal propensity to save (MPS)? | |
Ans. The marginal propensity to save (MPS) is the proportion of additional income that individuals or households choose to save instead of spending. It represents the change in saving resulting from a change in income. For instance, an MPS of 0.20 means that for every additional dollar of income, individuals will save 20 cents and spend the remaining 80 cents.
| 4. How does the multiplier effect relate to government spending? | |
Ans. Government spending plays a crucial role in the multiplier effect. When the government increases its spending, it injects money into the economy, leading to increased income for individuals and businesses. This increase in income then results in higher consumption and further economic activity. The multiplier effect amplifies the initial government spending, leading to a larger overall increase in economic output.
| 5. How does the multiplier effect impact the economy during a recession? | |
Ans. During a recession, the multiplier effect can be used as a tool for economic stimulus. By increasing government spending or implementing policies that encourage consumer spending, the multiplier effect can help boost economic activity. The initial injection of funds or policies creates a chain reaction of spending, leading to increased income, employment, and overall economic growth.
Text Transcript from Video
hey it's time for a key concept that you
have to know it's called the spending
multiplier all right let's say you go to
school and as you're walking unless you
find a hundred dollar bill on the ground
you look around everyone's gone it's
just you in hundred bucks and you take
it there's only two things you can do
you spend it or save it that's it that's
all how much did that hundred dollars
would you spend and how much would you
save and that leads to a conversation
about the marginal propensity to consume
and something called marginal Pepsi to
say the marginal propensity consume is
the percentage how much you'd actually
spend if I gave you hundred dollars how
much would you spend so let's say for
example in your marginal penny to
consume is 0.8 or you would spend $80 if
I gave you hundred dollars right so how
much is your marginal propensity to save
well that must be point two alright it's
what's left over is how much you say
okay now that you got that you're ready
for something called the spending
multiplier when the government or people
or businesses spend money in the economy
that money actually gets multiplied
let's say this government spends a
hundred million dollars on a new school
all right that new school that's one
hundred million dollars and people get
that money for example the guy who did
the drywall it gets a certain dollar
amount when he gets that money what does
he do with it
he consumed some and he saves the other
part right how much in this case let's
say he consumes 80% of it and then he
saves twenty percent of it let's say he
buys a new work truck now the person who
stole the work truck now has more money
maybe Oh spent it on a surfboard a
laptop computer and go to a restaurant
now the people that saw those things
have more money and they spend some of
it and they say something so money that
jumps the economy gets multiplied this
penny multiplier for math purposes won
over the marginal propensity to save so
in this situation how much is this penny
multiplier the spending multiplier is
one over point two and 10.2 is one over
one-fifth a little bit of math tells you
the multiplier is five what does that
mean well if the government spends a
hundred million dollars that will get
multiplied times five when it's good
multiply times other people to become
five hundred million dollars in the next
video you do a bunch of practice
questions make sure
you get it so make sure to watch it
until next time
have to know it's called the spending
multiplier all right let's say you go to
school and as you're walking unless you
find a hundred dollar bill on the ground
you look around everyone's gone it's
just you in hundred bucks and you take
it there's only two things you can do
you spend it or save it that's it that's
all how much did that hundred dollars
would you spend and how much would you
save and that leads to a conversation
about the marginal propensity to consume
and something called marginal Pepsi to
say the marginal propensity consume is
the percentage how much you'd actually
spend if I gave you hundred dollars how
much would you spend so let's say for
example in your marginal penny to
consume is 0.8 or you would spend $80 if
I gave you hundred dollars right so how
much is your marginal propensity to save
well that must be point two alright it's
what's left over is how much you say
okay now that you got that you're ready
for something called the spending
multiplier when the government or people
or businesses spend money in the economy
that money actually gets multiplied
let's say this government spends a
hundred million dollars on a new school
all right that new school that's one
hundred million dollars and people get
that money for example the guy who did
the drywall it gets a certain dollar
amount when he gets that money what does
he do with it
he consumed some and he saves the other
part right how much in this case let's
say he consumes 80% of it and then he
saves twenty percent of it let's say he
buys a new work truck now the person who
stole the work truck now has more money
maybe Oh spent it on a surfboard a
laptop computer and go to a restaurant
now the people that saw those things
have more money and they spend some of
it and they say something so money that
jumps the economy gets multiplied this
penny multiplier for math purposes won
over the marginal propensity to save so
in this situation how much is this penny
multiplier the spending multiplier is
one over point two and 10.2 is one over
one-fifth a little bit of math tells you
the multiplier is five what does that
mean well if the government spends a
hundred million dollars that will get
multiplied times five when it's good
multiply times other people to become
five hundred million dollars in the next
video you do a bunch of practice
questions make sure
you get it so make sure to watch it
until next time
About this Video
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Nov 22, 2024 Last updated |
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