QUESTION 37 (4 marks)
A simple multiplier estimate assumes households spend 80% of additional income on domestic goods. In practice some spending goes to imported products and some income is taxed. Explain why the original estimate may overstate domestic output growth.
Practice marking scheme
Answer
Additional import and tax leakages reduce the domestic spending retained in each round.
Working
The simple estimate is k = 1/(1 − 0.80) = 5. Imported consumption creates demand for foreign production, and taxation withdraws disposable income unless it is re-spent through a separate government response. Smaller domestic spending rounds lower the realised domestic multiplier. Capacity limits and changes in confidence can further reduce real-output effects.
Marking criteria
- States the simple multiplier of 5. [1 mark]
- Explains import leakage. [1 mark]
- Explains tax leakage with a relevant qualification. [1 mark]
- Links smaller domestic rounds to lower output effects. [1 mark]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.