Question

What is the multiplier principle? What determines the size of the multiplier? Does the multiplier make it more or less difficult to stabilize the economy? Explain.

Answer 1

The multiplier principle depicts that changes in any of the components of aggregate demand will have larger effect on total income in the economy.

Reserve requirement ratio determines the size of the multiplier.

Multiplier= 1/rrr

Where rrr= reserve requirement ratio.

The multiplier makes it less difficult to stabilize the economy due to its multiplier effect on income. A small change in spending would increase the real income by larger proportion. This will fasten the process of stabilising the economy.