Inversion and Multiplier: Difference between pages

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1.
An economic concept which states that an injection into the economy will increase the equilibrium level of national income by more than the amount of the injection.  


A term used in foreign exchange rate quotation.
The multiplier is defined as 1/(1-MPC), where MPC = Marginal Propensity to Consume.


 
Hence the higher the MPC, the greater the increase in aggregate income as a result of the injection.
'''Example'''
 
Consider the historical FX quote:
 
GBP 1 = 1.4598 - 1.4602 USD.
 
The base currency is GBP.
 
This is the currency there is a single unit of, to be exchanged for a variable number of USD.
 
 
The inversion of this FX quote means expressing the same price, but with the other currency as the base currency (USD here):
 
USD 1 = (1 / 1.4602) - (1 / 1.4598) GBP
 
USD 1 = 0.6848 - 0.6850 GBP.
 
 
In the inverted FX quote, USD is the currency there is a single unit of (to be exchanged for a variable number of GBP).
 
 
2.
 
In any market, the reversal of a normal - or commonly expected - relationship.
 
For example the situation of an Inverse yield curve, where longer maturities of funds are trading at LOWER yields than shorter-dated maturities (being the opposite of the normally expected upward-sloping relationship).




== See also ==
== See also ==
* [[Base currency]]
* [[Marginal propensity to consume]]
* [[Foreign exchange]]
* [[Marginal propensity to save]]
* [[Inverse quote]]
* [[Inverse yield curve]]
* [[Reciprocal]]
* [[Tax inversion]]
 
[[Category:Manage_risks]]

Revision as of 08:18, 22 August 2013

An economic concept which states that an injection into the economy will increase the equilibrium level of national income by more than the amount of the injection.

The multiplier is defined as 1/(1-MPC), where MPC = Marginal Propensity to Consume.

Hence the higher the MPC, the greater the increase in aggregate income as a result of the injection.


See also

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