The Basic Idea of the Multiplier

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Without taking into consideration import and taxes the concept of multiplier is a continuous loop where one affects the other criteria and hence brings about a change. The chain continuous in the following manner, the autonomous expense brings increase in the real GDP which directly affects the disposable income. Without external factors the disposable amount and the real GDP are same. This disposable increase makes the consumption amount rise which in turn increases the overall aggregate expenses. This circle of rise in value of one factor such as consumption expenses as a result of increase of another factor like aggregate expenses leads to constant fluctuation. Therefore the magnitude if change in the different variables is determined by the multiplier.

On observing Figure 11.5 it shows a clear depiction of aggregate planned expenses schedule. Taking an example if the real GDP is set at a value and aggregate expense is more than that, it is noticed for every $1 trillion rise of GDP the aggregate goes up by $0.75 trillion. There is a curve in the diagram which intersects at an angle of 45 degree with the equilibrium and is marked point B. The equilibrium expense is also assigned a value and helps further understand the schedule of the figure. It is interesting to follow the changes of the equilibrium as the real GDP changes. In 11.5 it is seen that at every level the real GDP undergoes a hike in value. Ultimately when the point D at the point of intersection on the curve is reached the value of the equilibrium expenditure reaches $15 trillion. This is because at each stage real GDP goes up by $0.5 trillion. Again without the external factors of taxes and imports the real GDP equals the aggregate planned expenditure.

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