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If Investment in an economy increases by 20, the “multiplier effect” results in a final increase...

If Investment in an economy increases by 20, the “multiplier effect” results in a final increase in equilibrium GDP ( on the demand side) than is greater than 20. Explain why ( don’t worry about the specific numbers, just give a general argument that explains the “multiplier effect”; your answer can be brief)

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Answer #1

Multipleir works as a chain of expenditure and increase the overall output by a multiple of the actual expenditure. For example If Investment is 20 then that 20 will allow the firm to buy goods in the market and the expenditure will be income for the firms that are selling those good, they will keep some part of that income as saving and spend more, again the expenditure by these firms are income for other and so on, that is the reason why actual increase in the GDP is far more than the increase in the investment amount.

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