The multiplier — Edexcel A-Level Economics A
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The multiplier explained
The multiplier affects the economy because a change in injections or withdrawals produces a larger final change in real national income, output and employment.
Read the full explanation
A rise in investment, government spending or exports can raise aggregate demand, and the multiplied increase in income may reduce unemployment and raise output, though it can also add to inflationary pressure if the economy is near full capacity. A fall in injections, or a rise in leakages such as saving, taxation or imports, can multiply a downturn. The size of the effect depends on marginal propensities: a higher MPC or lower leakages give a larger multiplier. Effects also depend on spare capacity, the price level and time lags. For example, with k = 5, a £10 billion fall in investment could reduce national income by up to £50 billion.
Your focus
- Explain how the multiplier transmits changes in injections or withdrawals into larger changes in national income.
- Analyse the effects of the multiplier on output, employment and the price level.
- Evaluate how spare capacity and marginal propensities influence the size and nature of the multiplier's effects.
The multiplier exam tips
Marking Points
- Explains that the multiplier magnifies the final change in real national income, output and employment relative to the initial change in injections or withdrawals.
- Links a rise in injections (investment, government spending, exports) to a multiplied expansion, and a fall in injections or rise in leakages to a multiplied contraction.
- Explains that the size of the effect depends on marginal propensities: a higher MPC or lower MPS, MPT and MPM produce a larger multiplier.
- Discusses that the effect on the economy depends on spare capacity and the price level, since near full capacity a multiplied rise in demand may mainly raise prices rather than output.
- Applies a numerical example, e.g. k = 5 means a £10 billion change in investment changes national income by up to £50 billion.
Examiner Tips
- 💡Use the multiplier value to quantify the effect, then explain the resulting change in output, employment and prices.
- 💡Consider both directions: analyse a rise and a fall in injections to show the multiplier works symmetrically.
- 💡Bring in spare capacity and the price level to judge whether the effect is mainly on real output or on inflation.
- 💡Keep the chain of reasoning explicit: injection → income rounds → multiplied change in national income → effects on output, employment and prices.
Common Mistakes
- Claiming the multiplier always raises output. Correction: it magnifies the initial change in either direction, so a fall in injections multiplies a contraction.
- Ignoring capacity constraints. Correction: if the economy is near full capacity, a multiplied rise in demand may raise the price level more than real output.
- Assuming the multiplier is fixed for all economies and times. Correction: it varies with marginal propensities and leakages, which change over time.
- Confusing the multiplier with a simple one-for-one change. Correction: the final change in income is a multiple of the initial change, not equal to it.