Question

1. Explain the basic idea of the expenditure multiplier ? and explain how, could the consumers change the magnitude of the multiplier.

2. Explain why the expenditure multiplier is greater than 1. ?

Answer 1

The multiplier reflects the reality that a new iincrease in expenditure has multiple effect on output or income. This is because as people's income increase due to increase in expenditure, they increase their own spending. As a result new people recieve fresh income who inturn purchase new things which again increases income of those who sold goods and so on. Thus there is multiple increase in output or income

Consumers can change it by changing their mpc or Mps.

2 It is greater than one because people will always spend a part of their increase in income(resulting inturn from an increase in expenditure) . Thus an addition to expenditure leads to more addition in income or outout