Multiplier Effect

The multiplier effect refers to the fact that an initial change in the level of Aggregate Expenditure will flow through the economy, and have a greater than proportional effect on the final level of income in the economy

The Multiplier in the Australian economy is on average between 1.5 and 2.5.

see [[5_-Changes_in_Expenditure-_The_Multiplier#working-out-the-multiplier|Working Out the Multiplier]]

The mitliplier coefficient The value that this comes out to tells us how much extra we will get for each extra doller extra in aggregate expenditure. it is limited by leakages (usually just MPS) which we include in equation e.g. , therefore for every doller, we get 2 dollers back in the multiplier effect.

This means that the more consumption in the economy, the greater the Multiplier Effect is, an increase in Aggregate Expenditure will multiply itself by more.

An Initial increase in ming investment equal to AEAE+ \Delta I$, as a result this will send a signal to firms, that the level of aggregate expenditure in the economy is greater than the level of output as inventories fall. >>>

• Output Increases (to meet demand)
• Higher resource usage (labour)
• Falling Unemployment As a reulst hosueholdi ncomes will rise leading (something) consumption. Theis process will continue indefiently, smaller amounts until the initial (something) has flowed through the economy five times and the economy returns to equilibriant a greater than proportional change in the levels of 4

Effects of the Change

1. Economic Growth | Real GNI ^
2. Unemployment falls as firms takeup the spare capacity in the economy.
3. Inflation not shown on the model, however, it can be inferred that demand pull Inflation will reduce due to rising Hosuehould Income, cost push inflation

N Govt

• Increase Taxation revenue
• Decrease Welfare spending
• Imrpovements in budget balance N CAB
• Worsening of the trade balance Due to
  • Increased household spending on imports

^ this is good for questions like:

• outline the factors that influence the economy (8 marks)
• discuss the influence of the change in aggregate expenditure on the macroeconomy

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Quote

The multiplier effect is when a sector in a economy xperiences a increase in output and through the multiplier effect other sectors in the economy also experience increases in output.

also see H5 - The Multiplier Effect