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The Multiplier Effect

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An explanation of the Multiplier Effect

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The Multiplier Effect

  1. 1. The Multiplier EffectChanges in Aggregate Demand are likely to have more than one effect. This is dueto the Circular Flow of Income in which money is circulated around the economy. Consumers ProducersIn the simple diagram above the money that Consumers spend on products fromproducers, is the producer’s income as well as being consumer expenditure. This isalso true for the bottom arrow, which indicates the consumers income but also theproducers expenditure.The multiplier effect explains what happens with an increase in AggregateDemand. If for example consumer spending rises, this indicates that consumers arebuying more, which increases the demand for a business’s products. This causesthe business to purchase capital goods (investment) in order to cope with theexcess demand. In addition to this the companies would have to raise the wagerate to cope with the extra demand, which then increases government revenueand consumer spending.This is known as the multiplier effect. Aquinas Economics @aquinaseconomic