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How does the multiplier amplify a change in spending, and how does the accelerator link investment to growth?

The multiplier and accelerator: the circular flow of income, injections and withdrawals, the multiplier process and its calculation from the marginal propensities, and the accelerator effect.

An Eduqas A520 answer to the multiplier and accelerator, covering the circular flow of income, injections and withdrawals, the multiplier process and how to calculate it from the marginal propensities to consume, save, tax and import, and the accelerator effect linking investment to the rate of change of output.

Generated by Claude Opus 4.812 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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Quick answer

The circular flow of income traces the movement of money between households and firms. Injections add to the flow: investment (I), government spending (G) and exports (X). Withdrawals (leakages) remove from it: saving (S), taxation (T) and imports (M). The economy is in equilibrium when injections equal withdrawals. The multiplier is the ratio of the final change in national income to the initial change in an injection: an injection raises incomes, part of which is re-spent, raising incomes again, and so on. Its size depends on the marginal propensity to withdraw: $\text{multiplier} = \frac{1}{1 - MPC} = \frac{1}{MPW}$ . The smaller the leakages, the larger the multiplier. The accelerator links investment to the rate of change of national income: when output is growing faster, firms invest more to expand capacity, so investment is volatile.

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What this dot point is asking
The circular flow, injections and withdrawals
The multiplier
The marginal propensities
The accelerator
Examples in context
Try this

What this dot point is asking

Eduqas wants you to explain the circular flow of income, identify injections and withdrawals, describe and calculate the multiplier from the marginal propensities, and explain the accelerator effect. The multiplier is a key quantitative skill and the reason fiscal policy can have an outsized effect on aggregate demand.

The circular flow, injections and withdrawals

When injections exceed withdrawals, national income rises; when withdrawals exceed injections, it falls. This is the engine behind the multiplier.

The multiplier

The marginal propensities

Calculating the multiplier with several leakages

Step 1: state the data

In an economy, out of each extra pound of income, 0.1 is saved, 0.2 is taken in tax and 0.1 is spent on imports. The government raises spending by $\pounds 5$ billion.

Step 2: find the marginal propensity to withdraw

$MPW = MPS + MPT + MPM = 0.1 + 0.2 + 0.1 = 0.4$ . (Equivalently, $MPC = 1 - 0.4 = 0.6$ .)

Step 3: calculate the multiplier

k = \frac{1}{MPW} = \frac{1}{0.4} = 2.5.

Step 4: find the total effect

Total rise in national income $=$ injection $\times$ multiplier $= \pounds 5 \text{bn} \times 2.5 = \pounds 12.5$ billion. The $\pounds 5$ billion of spending eventually raises national income by $\pounds 12.5$ billion. Higher leakages (a larger MPW) would give a smaller multiplier and a smaller total effect.

The accelerator

The multiplier and accelerator interact: an initial injection raises income through the multiplier, the faster income growth induces extra investment through the accelerator, which is itself a further injection, generating cycles of expansion and contraction (the multiplier-accelerator model of the business cycle).

Examples in context

Infrastructure spending. A large public investment programme raises incomes for construction workers and suppliers, who re-spend, illustrating the multiplier.
Open economies. The UK's high marginal propensity to import gives it a smaller multiplier than a more closed economy, a key evaluation point.
Investment volatility. The sharp swings in business investment over the cycle reflect the accelerator, as firms add capacity in booms and cut it when growth slows.

Try this

Q1. In an economy the marginal propensity to save is 0.2, the marginal propensity to tax is 0.2 and the marginal propensity to import is 0.1. Calculate the multiplier. [3 marks]

Cue. $MPW = 0.2 + 0.2 + 0.1 = 0.5$ , so the multiplier is $\frac{1}{0.5} = 2$ .

Q2. Explain why investment tends to be more volatile than consumption over the business cycle. [4 marks]

Cue. The accelerator: investment depends on the rate of change of output, so it rises sharply when growth accelerates and falls when growth slows, exaggerating the cycle.

Exam-style practice questions

Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Eduqas Component 2 20204 marksIn an economy the marginal propensity to consume is 0.75. Calculate the value of the multiplier and the total rise in national income from an extra

\pounds 20

billion of government spending.

Show worked answer →

A short calculate question. The multiplier from the marginal propensity to consume is $\frac{1}{1 - MPC}$ .

Multiplier: $\frac{1}{1 - 0.75} = \frac{1}{0.25} = 4$ .

Total rise in national income: the injection times the multiplier, $\pounds 20 \text{bn} \times 4 = \pounds 80$ billion.

Markers reward the multiplier of 4 and the final $\pounds 80$ billion. A common slip is to use the MPC (0.75) directly instead of $1 - MPC$ in the denominator.

Eduqas Component 3 (macro) 202212 marksEvaluate the view that the multiplier makes fiscal policy a powerful tool for managing aggregate demand.

Show worked answer →

A levels-of-response essay. Knowledge and application: explain the multiplier process: an injection raises incomes, part of which is re-spent, raising incomes again, so the final change in national income is a multiple of the initial injection. State the formula and that the multiplier is larger when the marginal propensity to withdraw is smaller.

Analysis: develop how this amplifies government spending changes, shifting AD by more than the initial injection.

Evaluation: weigh the limits: the multiplier is smaller with high leakages (saving, tax, imports); near full capacity the extra demand is inflationary rather than expanding output; crowding out and time lags reduce the effect; and the size of the multiplier is hard to estimate. Conclude with a supported judgement that the multiplier strengthens fiscal policy but its power depends on spare capacity and the size of leakages.

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Sources & how we know this

Eduqas A Level Economics Specification (A520) — Eduqas (2015)