hi everyone the multiply and accelerated theories Advanced kind of theories when it comes to macroeconomics but theories you should be able to use in your essays let's start by looking at the multiplier the multiplier is a process by which any changes in the components of aggregate demand will lead to an even greater change in National output very simply we've learned so far that any increase in ad we picked the diagram in your head will shift uh aggregate demand lity to the right and increase National output from y1 to Y2 so growth will increase on our diagram we've said that the multiplier effect goes one stage further and says that the actual effect on growth will not stop at Y 2 there'll be a further increase in growth as well that is the multiplier effect now how does that happen well very simply if you break this down all the multiplier is saying is that any increase in spending by aggregate demand going up for whatever reason that is an increase in spending will create income for somebody else which will then facilitate spending by those people which will create income from for somebody else which will facilitate further spending by those people which will create more income and more spending and more income and more spending you get into this virtual virtuous cycle and the end effect is that 80 doesn't just shift to the right because of that initial amount of spending but actually it keeps shifting to the right before settling on a much greater change in National output than the initial increase in spending we can always uh measure the multiplier as well and the equation for the multiplier is this one over 1 minus the marginal propensity to consume now what is the marginal propensity to consume it's just very simply out of each extra pound that's being generated in terms of income how much is actually going to be spent so the MPC can take a range of values between not and one where one represents 100% of that extra pound is being spent right and not is that none of that extra pound is being spent so if I gain an extra uh 50 worth of income and I decide to spend £25 of that extra income my MPC will be 0.5 all right uh we can also measure it going the other way instead of 1 over 1 minus the NPC we could just look at one over the marginal propensity to withdraw that's just the opposite so instead of you consuming that extra pound how much are you not consuming basically uh how much are you taking away from the economy either in terms of savings in terms of Taxation in terms of spending on Imports so that is the same as the marginal propensity to save plus the marginal propensity to Tax Plus the marginal propensity to import all the different ways instead of spending your money you could be uh taking your money out of the circular flow of income uh we could also measure it using this equation which is exactly the same as that one if you think about it let's take an example here let's say that uh the government decides to spend some money so let's say government decides to inject right 100 million pound into the economy now we know on a diagram that's going to shift ad to the right but the final effect will not just stop at that increase in growth there will be a further increasing growth as a result of the multiplier effect so let's say that uh from that 100 million pound every time income is generated 80% of that income is spent all right so that initial increase of100 million the first time £80 million will be spent because1 million of income is being generated 80 million will then be spent whoever then receives that 80 million 80% of that will be spent again whoever receives that spending that income 80% will be spent again so we're going to assume here that the marginal propensity to consume is therefore equal to 0.8 now immediately when we have this we can then work out the multiply value and then we can work out what the final change in Real GDP will be and it won't just be an increase of 100 million it will actually be more than that so let's have a look one minus sorry one over 1 minus 0.8 which is 1/ 0.2 and that gives you a value of five and that is our multiplier effect and what we do with that is we times the multiplier by the initial increase in spending which is 100 million so 5 * 100 million gives you £500 million and that's the final change in output that's the final increase in National output as a result of this initial increase in spending yes so basically 400 million pound is the value of the multiplier in this sense it's how much extra National output is increased as a result of the multiplier effect now we can actually show that on a diagram so on a diagram let's take that example so we have here the price level and let's just go real GDP let's take a Keynesian long aggregate supply curve and let's say Ad initially was over here at ad1 with a price level P1 and output level y1 now that was the initial level of output we' just said government spending has increased by 100 million and we know that's going to shift Eddie to the right to 8 2 and that will increase growth and growth will increase from y1 to Y2 let's be more specific let's say that is y1 plus that1 million so that increase from y1 to y1 plus 100 million is just the government spending impact but now we're saying well the multiplier effect will mean AD keeps shifting income is being generated for somebody else which will facilitate F spending etc etc and we settle on an output level which is actually y1 + 500 million so you can see how a keeps shifting to the right and you get a settling equilibrium which is much further to the right than the initial increase in spending which only takes us to ad2 that is the multiplier effect and specifically this final shift here is the multiplier right there right so that's how you control the multiplier effect on a diagram what I also want to briefly talk about is what can determine the size of the multiplier so the bigger the value of the multiplier the more the final change in Real GDP will be obviously um but what determines that value well very simply it's the NPC so the bigger the NPC the bigger the multiplier the smaller the NPC the smaller the multiplier now uh what can determine the NPC well if in the economy people tend to save if there is a culture of saving then that NPC will fall smaller and will lead to a smaller multiply value if there's a lot of tax in the economy taxation levels are very high that's going to reduce the overall multiply value if the marginal propensity to import if people like to when they gain income spend a lot of it on Imports that's going to reduce the value of the NPC so what determines the value of the multiplier basically the size of these factors the level of saving the level of import expenditure the level of Taxation in the econ if any of those three are very high or all of them are very high that's going to reduce the multiply value all right okay great let's also now look at the accelerator effect which is another high level concept when it comes to macroeconomics the accelerator is a a very simple effect multiplier is all about consumer spending how much extra spending takes place when initial uh spending actually occurs when an initial increase in ad occurs the accelerator looks more at investment looks at FM spending money not consumers spending money so the accelerator is this uh it says that changes in investment can be directly linked to changes in the rate of GDP growth the key word there is rate and all it says very simply is when the rate of GDP growth is actually increasing then firms are going to be more willing to invest you can imagine that there'll be an increase of investment at the same time why because firms are bullish they think that demand is going to be high in the future growth is going to be high in the future it's going to be increasing r rapidly now is a good time to invest in New Capital now is a good time to spend money on maybe expanding my factory or uh investing new office space or moving into uh a new office premises whatever it might be they invest their money and uh that uh is as a direct result of expected future rates of growth however if the rate of GDP growth starts to slow down or it starts to go negative the opposite will be true firms will stop in investing and hold back and that's going to reduce aggregate demand so with higher rates of GDP growth that is likely to be speeded up quickened by an increase in investment but if the rate of GDP growth starts to slow down starts to fall all go negative then firms will hold back on investing cut their investment expenditure and that will push ad down so that will facilitate even quicker decreases in the rate of GDP growth both effects here can be used multiply and accelerated to explain the shape of the business cycle I've explained that in my more advanced economic cycle video all right that's it muline accelerator done thanks for watching see you next time