Question

(a) what is meant by the term ' multiplier effect ' as used in macroeconomics? (b)...

(a) what is meant by the term ' multiplier effect ' as used in macroeconomics?

(b) what determines the size of the spending (expenditure) multiplier?

(c) why is the multiplier effect of an increase in welfare payments less than the multiplier effect of an increase in government spending of an equal amount?

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Answer #1

a) Multiplier effect means that an initial change causes a larger change in the system due to chain of effects.

b) Spending multiplier = 1/(1-c)
c: Marginal propensity to consume
It is directly related to the size of the marginal propensity to consume.

c) All of government spending amount adds to the aggregate demanded. However, when equal amount of transfer payements are made, some portion may be saved by the consumers. Hence, the multiplier effect multiplier effect of an increase in welfare payments is less than the multiplier effect of an increase in government spending of an equal amount

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