THE MULTIPLIER EFFECT

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THE MULTIPLIER EFFECT

WHAT IS IT?

occurs when an initial injection into the economy causes a bigger final increase in national income

like ripples in a pond

EXAMPLE: government spent an extra £2billion on the NHS, thus salaries/wages increase by £2billion, therefore national income will increase by £2billion

AD = C + G + I + (X - M)

INJECTIONS INCLUDE:

investment (I)

government spending (G)

exports (X)

NEGATIVE MULTIPLIER EFFECT

can effect in reverse too

if the government cuts spending, some public sector workers may lose their jobs, this will cause an initial fall in national income. however with higher unemployment, consumption will fall as the unemployed will spend less. therefore resulting in a decrease in AD.

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