Question

Part 2: Analyze the concept of the multiplier effect. How does this concept relate to both economic recessions and vigorous economic expansion?

Answer 1

Solution-

The multiplier effect is described as the increase in income that leads to more spendingwhich creates more income for others etc.This is a circular flow.“This is because an injection of extra income leads to more spending, which creates more income, and so on” Economics Online,n.d. para 1).The government invests money in attempts to create more jobs which will interngenerate more spending to stimulate the economy.The size of the multiplier depends on themarginal decision to spend. As your household income increase this leads to having more money inyour pocket which therefore can lead to an increase in spending or saving.The income can changenationally due to changes in spending for private, government, business, etc. As there are shifts inconglomerated demands the mass output will be also changed

When there is an economic expansion there will be minimal spending that will in turn lead toan increase in income that will lead to an increase in spending. “A withdrawal of income from thecircular flow will lead to a downward multiplier effect. There canbe a potential downward multiplier effect on the economy when there is an increased withdrawal forexample with a rise in savings, import spending or taxation