Question

How does the multiplier effect affects the business cycle?

chapter 5

Answer 1

ANSWER:

The multilpier effect - The multiplier effect means multiplying of money. it can be expalined as when as increase in sepnding causes an increase in final income/natinal income/ GDP output. For example - if government increases it's expenditure it will release more money into the economy rising salaris and wages the increased salary then will be spent on any other sector of economy which will help in increasing the GDP. In short, Multiplier effect is when spending increases the final income or national income.

AFFECT OF MULTIPLIER EFFECT ON BUSINESSS CYCLE

The business cycle refers to the flactuations in the gross domestic product(GDP). The multiplier effect affects the business in the following way:

When government increases it's expenditure or injects money into the conomy it will increse the salaries and wages of the people this increased salary will be spent by the people on buying more products or it will increase the purchasing power and when purchasing power is increased it will increase the sales of businesses and with increased sales means more more profits will be earned by the businesses and more profits means increased national income and more salaries will be paid to workers when profits are high and again more money in the hand of people will follow the same cycle.

Hence, the multiplier effect affects the business cycle.