Definition: An initial change in aggregate demand can have a much greater final impact on
the level of equilibrium national income.
This is known as the multiplier
effect.
It comes about because injections of new demand for goods and services into
the circular flow of income stimulate further rounds of spending – in other
words “one person’s spending is another’s income." This can lead to a bigger
eventual effect on output and employment.
Questions for discussion: What implications does the multiplier effect have for economic policy decisions?
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