An increase in government expenditure is an injection in the circular flow on income. An injection is an addition to the circular flow of income.
The diagram above illustrates some of the injections and leakages in the economy.
It is however very important to find out exactly what will be the effect on the economy from an increase in injections. Economists do this by calculating the multiplier effect of the increase in the government expenditure on the economy. The multiplier indicates how many times that the injection of original spending circulates through a local economy. As a result of re-spending, it benefits the local people.
The formula for calculating the multiplier effect is 1/(1-MPC).
When there is an increase in the government spending, the over all affect on the economy will depend on the multiplier, which depends on the marginal propensity to consume. This is because not all the money injected into the economy will be spent. Some of it is saved. For example if the government's expenditure increases by £10 million, people in the economy will have more money and they will spend more. How much the over all increase in the national incomes takes place will depend on the MPC. If the MPC is 0.5 the multiplier will be 2. This means that the total increase in the national income will be:
10 X 2 = £ 20million.
The main problem with calculating the multiplier is that extra spending could dissipate in inflation and therefore the true effect if the injections will not be known.
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Quality of writing
Spelling and grammar are absolutely fine, which is obviously a good thing as spelling and grammar may be assessed when being marked. The layout was very good, with paragraphs for each new topic, for instance there was a new paragraph for analysis. Separating work out like this makes your work look clearer and easier to understand. This essay received a full five stars, for answering the question perfectly, with good spelling and a small but good amount of analysis.
Level of analysis
The question is only a describe and explain one, so there was no need to analysis. The level of explanation was very good, and would be a good source to turn to for an explanation of the multiplier effect. Also the author brings in a little bit of analysis in the last paragraph by discussing the impact of inflation on measurements, which although brief, works as a good aside.
Response to question
The author answers the question perfectly. They define all the key terms (National Income) and describe/ explain the multiplier effect, excellently. Good use of diagram to help explain the concept and importantly explains how the diagram relates to the question. Also defining key terms at the start of any essay is greatly recommended, as it shows instantly an understanding of the topic.