IB HL Exam Review: Explain the multiplier + how it is calculated

Explain the multiplier + how it is calculated

Macroeconomics is the study of the decisions and performances of an entire economy, and the multiplier effect is something that governments need to think about when intervening to shift aggregate demand. Aggregate demand is the total demand for all goods and services in an economy. The multiplier effect is an effect that says an initial expenditure injection into the business cycle will multiply as it provides money for consumers to consume and contribute into the market and shifts the aggregate demand, thus increase the national income of the nation. The effect also states that the resulting benefit will be a multiple of the initial amount injected.

The formula to find the multiplier is:

The resulting final amount /initial injection into market

 

The value of the multiplier also depends on the marginal propensity to consume (MPC), the portion spent of each additional income from the injection. This is figured by dividing the total amount of additional income by the amount consumed from the additional income. The higher this number, the higher the value of the multiplier will be.

The diagram above explains the benefits of the multiplier effect as the AD shifts from government injection. At first the economy is at a GDP of Y1, at price P1 and with AD1. The initial injection shifts the AD curve from AD1 to ADg, and increases the GDP from Y1 to Yg. Then, in the long term the injected expenditure further multiplies as it provides additional income to labor, money for capital investment, and further consumption. This shifts the AD curve from ADg to AD2, and increases the GDP from Yg to Y2. The multiplier is Y1-Y2/Yg-Y1.

Reflection: End of Unit test – Section 4

Reflecting on my performance from the End of Unit test, I did extremely well compared to what I predicted. I obtained a 24/25, resulting as 98%. I believe I obtained this score because I was confident in exchange rates, and studied the advantages and disadvantages of each exchange rate beforehand.

The improvements that I need to make are:

• Label units on axes – price of yuan in $, than just yuan/dollar
• leave space of start on new page when answering different questions
• define terms although they were defined in previous problem
• Use examples for specific situations
• write out acronyms (exp. WTO)

Thank you Ms.Q for taking your time to grade our tests, as well as visiting my blog to comment on my blog post. Your comments on my test were very understandable and easy to read, and helped me reflect on my performance.

Bangladesh – Developing countries

Bangladesh

Bangladesh is well known to be an overpopulated, poorly governed country in poverty.

It has a GDP per capita of $429.26 per capita (2006), and a HDI (Human development Index) of 0.52.

The Gini index is 33.4, showing that its income is distributed in equally. Despite this, their unemployment rate is 2.5% fairly good compared to other developing countries.

It’s population growth rate is 2.022%, with a fertility rate of 3.08 children per woman. Because of the overpopulation, it’s poverty population is 3.49% of the world’s poor, 5th out of 80 nations and the percentage of the population below the poverty line is 45%.

Bangladesh has a low per capita income and poverty population that shows no improvement. Also its population is ranked 7th in the world at 147,365,352. The dependency ratio per working-age population is 0.64, saying that there are 6.4 dependent people per 10 working class.

Here is a footage from AFP about Bangladesh’s poverty: