Not quiet sure on what an example of the multiplier is.
By Ian McCarthy and Kelvin Weymes
What is The Multiplier?
• The multiplier Is the number of times an injection of
money leads to an increase in the national income.
The size of the multiplier depends on
• The marginal prosperity to consume
• The marginal prosperity to save
• The marginal prosperity to tax
• The marginal prosperity to import
Example of The Multiplier from
• The Economic table of Francois Quesnay, laid the foundation of
the Physiocrat school of economics which is credited as the first
precise formulation of interdependent systems in economics
and the origin of multiplier theory.
• In the economic table, one sees variables in one period feeding
into variables in the next period and a constant rate of flow
yields geometric series, which computes a multiplier.
• The modern theory of the multiplier was developed in the
1930s, by Kahn, Keynes and Giblin.
What is Inflation?
• Inflation is the rate at which the general level of prices
for goods and services is rising and subsequently
purchasing power is falling.
• This occurs when demand for products and services by
consumers is stronger than the supply of the desired
products and services.
• Debtors gain in the short term as they can repay the
load with inflated currency which is worth less.
• An inflation rate is the percentage increase in the price
of goods per year.
Example of Inflation from
• Zimbabwe - 2006 to 2009
• Inflation reached 66,212 % in December 2007, the highest in
the world at that time.
• In 2009 the Zimbabwe government issued the Z$100 trillion bill
as inflation eroded purchasing power.
• Shortly after the Zimbabwean dollar was abandoned in favour
of foreign currencies.
• A roll of toilet roll cost 145,750 Zimbabwe dollars
The Zimbabwean $100 trillion bill is now a
Example of other Inflation
from Economic History
Highest Monthly Inflation Rates in History
Month with highest
Time required for
prices to double
1.30 x 10 %
What is Deflation?
• Deflation is a decrease in the general price level often caused
by a reduction in the supply of money or credit, it can also be
caused by a decrease in government personal or investment
• Deflation is an indication that the economic conditions
• It is also usually associated with unemployment.
Example of The Deflation from
The Great Depression 1929-1940
• The Great Depression plunged the American
people into an economic crisis unlike any endured
country had seen before or since.
• It was worst and longest downturn in economic
history, it threw millions of hardworking individuals
into poverty and for more than a decade neither the
free market nor the federal government was able to
• Unemployment reached 24.1 percent in 1993 , the
stock market crashed, and consumers lost much of
Six problems caused by high inflation
• Rising prices causes worsening poverty as the essentials for
survival become more expensive which makes it less attainable
to those with low income.
• It creates uncertainty and entrepreneurs will be reluctant to
invest which will slow down potential for economic growth
• High inflation can reduce the incentive to save.
Six problems caused by high inflation
• Shoe leather costs – when prices are unstable there will be an
increase in search times to discover more about prices. It
increases the opportunity cost of holding money so more
people make visits to their banks.
• Consumers and businesses on fixed incomes will lose out .
• Menu costs – is extra costs to firms of changing price
information which can be important for companies who rely on
bulky catalogues to send price information to customers.
What is Hyperinflation?
•Extremely rapid or out of control inflation –
where prices increase very fast as money
loses it’s value
10,000 Mark would buy over
pounds of meat
250 Pounds of Meat
Germany 1922- 10,000 Mark
500,000 Mark would buy just 40
Germany 1923- 500,000 Mark
What caused Hyperinflation in Germany
• Conditions of the Treaty Of Versailles
• Obligated to pay war reparations
• 1923 Germany could not pay these reparations
• Occupation of the Ruhr - France and Belgium
• All out General Strike in Germany
• Government did not have enough to pay workers
What did this mean for Germany?
• Had to print more money
• Wages increased to keep up with prices
• The more money printed, more it diluted its value
• Eventually money became worthless- paper money
• Wages increased
• Businesses raised prices• Wages got higher and higher
• People collected their wages in a wheelbarrow
• Prices of food went up higher than people’s wages
• Fixed incomes suffered
• Wages staying the same food prices going up –
• Too low to live on
• Those who had savings suffered –now worthless
Who benefitted from Hyperinflation?
• DebtorsPeople paying back debt gained as the money was not worth the same
as it once was
• Foreigners who visited GermanySmall amounts of money would be able to buy a lot in the wreckage of
Cost Push Inflation
• Cost Push Inflation is where the Selling Price must be increased due
to the cost of making the product or service rising in price
• Raw materials, wages, taxes
• Rising Prices in Irish potatoes since 2012• High demand for a limited supply
• €2.50 - €3.00 – local chipper
• If higher tax on alcohol- Wine prices will raise
Oil Crisis 1973
In response to Yom Kippur War –
OPEC Changes :
• Announced Oil Embargo
• Raise in all trade prices
• Unified Block on all exports
• Oil price raised by 70%
• Gave OPEC power
What did this lead to?
• Worldwide recession
• Long term possibility of high oil prices
• Smaller Quantities of Oil for more money
• Shortage of Petrol
• Heating, Electricity and Gas became an issue
• Saving energy – Oregon Christmas lights ban
• Unemployment/ Wage cuts– not as many people needed
• Campaigns – “Don’t be Fuelish”
1974- Prices raised 4 times higher than they had at the start of the Oil
• New alternatives
• Cheaper ways to live
• Cycling to work
• Solar power energy
• Japan- Produced Cars less petrol
• Moved on to electronics
Demand Pull Inflation
Definition• The demand for a certain product is greater than the amount of
goods being supplied
• When there are high demands, prices will rise
• Individuals are trying to purchase the same good, the price will
• The complete opposite of Cost Push Inflation
Dublin’s Property Boom
• Full employment- More money
• Living like the United States
• People thought boom last forever
• People borrowing 8-10 times monthly income
• High demand for houses
• Houses limited
• Prices rose
• Oversupply of apartments
What did this lead to?
• Continuous rising in price
• Led to suburbs becoming more expensive e.g. Clontarf / Dublin 4
• Public Transport prices rising
• More borrowing
• Investment abroad
• Government investing their own money in property –
• Urban redevelopment
• Property Bubble bursting
• Debt - houses not worth what they once were
John Maynard Keynes
• Keynes predicted economic crisis in the 1930’s
1. If no one is spending, no money is coming into the economy
• People were saving money
• Government have to step in
• Stop raising taxes – Progressively poorer
• Getting the economy flowing again
• Investing in Businesses
• Creating jobs
• Employment will rise
• Herbert Hoover raised taxes
• Made Depression worse
• Keynes thought- “In the long run we are all dead”
• Start by reducing interest rates
• Increasing spending in infrastructure
• Increase in employment = increase in spending
• Get us back to a cycle of:
• Receiving income spending it back into the economy
What we should do in a Boom
2. According to Keynes –
Booms are not good as it has to lead to Bust
• We want a more steady economy
• We don’t want a big boom then a big bust
• Counter Cyclical Fiscal Policies• Increasing taxes in booms
• Cutting back in government spending
What does this lead to?
• Tax tends to decrease demand when the economy is booming
• E.g. property prices not going to an extreme in price
• Leads to people not spending as much
• Prepares us for the worst
• Keeps us steady
• Spending enough to keep cycle going
• Not going from one extreme to another
• Government have money – harder for a recession to hit
• Economy is stronger
Keynes Multiplier Effect
3. If a government invests money into a business
That business would then use that money to make goods and pay
With the goods they make, they then sell on
-They use the profits to buy the items necessary for making the
-This money is then going back into the economy and slowly increasing
Creating a circular flow of income
• Example – Ireland exports –
Government invested a lot of money into IT
Now exporting a lot of their goods which increases the multiplier effect