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Definition Of The Multiplier

Economics notes

Definition Of The Multiplier

➡️ The multiplier process is an economic concept that explains how an initial injection of spending into an economy can lead to a larger increase in total output.
➡️ It works by showing how an initial injection of spending can lead to a chain reaction of increased spending and income, resulting in a larger increase in total output.
➡️ The multiplier effect is an important concept in macroeconomics, as it helps to explain how small changes in spending can have a large impact on the overall economy.

What is the multiplier effect in economics?

The multiplier effect refers to the phenomenon where an initial change in spending or investment leads to a larger overall impact on the economy. This occurs because the initial spending or investment creates a ripple effect, as the recipients of that spending or investment then spend or invest that money themselves, leading to further economic activity and growth.

How is the multiplier effect calculated?

The multiplier effect is calculated by dividing the total change in output or income by the initial change in spending or investment. For example, if a $100 increase in government spending leads to a $200 increase in overall output, the multiplier would be 2 (i.e. $200/$100).

What are some factors that can affect the size of the multiplier effect?

The size of the multiplier effect can be influenced by a variety of factors, including the marginal propensity to consume (i.e. the proportion of additional income that is spent rather than saved), the degree of leakages from the economy (e.g. through imports or taxes), and the overall state of the economy (e.g. whether it is in a recession or expansionary phase). Additionally, the type of spending or investment that triggers the multiplier effect can also impact its size, with some types of spending (e.g. on infrastructure or education) having a larger multiplier effect than others (e.g. on luxury goods or imports).

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